Being an independent owner-operator or a small commercial truck fleet owner is a small profit margin business. To put that in simple language: it’s tough to make money because you have to pay for so many things yourself. This means that it behooves you to understand your business costs as much as possible and to then decrease those costs as much as you can.
In this article, I’ll give you a quick explanation for why cost-reduction is so important, and then a rundown of what the most common expenses are and how you might estimate how much they’ll cost you.
This article will probably be most helpful to you if you’re brainstorming getting into the business. Experienced owner-operators who want to revisit their budgets and streamline their costs should also find it helpful.
Income Estimation Tool
On the Rigbooks site, one of our most popular resources is the Owner-Operator Income Estimation calculator. It’s a tool you can use to plug in estimates of your business income and expenses to see how much you can expect to make, and how changing your various business costs impacts your bottom line. This article will help you better understand how the Income Estimator works.
Why reducing costs is so important
Your average independent owner-operator works at a 5% profit margin. What does that mean? It means that for every $20 in gross revenue you make, you are only making $1 in profit. The other 95% of that revenue will generally go towards your costs: your fuel, your truck payments and maintenance, your food and drink, your insurance, your permits, etc.
There are two ways to add to your profit (i.e., your take-home pay). One way is adding to revenue. The other way is reducing your costs. Let’s look quickly at adding revenue. Let’s say you get a big new job and it pays you $50,000 throughout the year: 5% of that is $2,500. So on average, that new gig only results in $2,500 profit for you.
Let’s look at the other way to increase profit: reducing expenses. Let’s say that with different driving techniques, you improve your gas mileage by just a half-mile a gallon, and this results in your saving $2,500 on fuel throughout the year. It doesn’t seem like much, considering you may be spending $50,000 on fuel a year. But because costs eat up around 95% of your revenue, making that small improvement is the equivalent of adding $50,000 in revenue to your business!
Looked at this way, it’s easy to see why you should be eliminating as many costs as possible. It’s just easier and more efficient to concentrate on lowering costs than it is to focus on adding business. You obviously need revenue too, of course, but it shows you what gives you a bigger bang for your buck.
Fixed versus variable costs
You can break down all costs into fixed costs and variable costs. In a nutshell, fixed costs are those expenses that stay pretty much constant month after month. They are possible you can’t change and that stay pretty much constant month after month. Things like truck insurance, truck payments, health insurance, and permits are all examples of fixed costs. (They can change, of course, whether that’s due to renegotiation, refinancing, or price changes, but the point is that in the short-term they’re pretty static.)
Variable costs are expenses that vary depending on how much you are driving and what kind of work you’re doing. Things like fuel costs, food costs, and maintenance are all examples of variable costs.
Understanding what costs vary and which stay the same for you helps you get a better grasp on what you can do to improve your take-home revenue. Here’s an article we wrote that goes into more depth on the differences between fixed and variable costs.
Now let’s look at a breakdown of the actual costs.
As you probably know, fuel is the biggest cost of owning and operating a truck. Your average owner-operator spends anywhere from $50,000 to $70,000 on fuel. Figuring out how much you’ll be spending on fuel is just a matter of figuring out your truck’s average cost per mile (fuel cost per gallon divided by average MPG) and then multiplying it by the number of miles you expect to be running.
Under truck-related expenses we’ll include:
- The cost of the truck (which might include monthly payments)
Truck expenses are the second-biggest expense behind fuel. This is true even if your truck is completely paid off and your main truck-related expense is maintenance and tires.
Maintenance costs are generally estimated to be around 10% of total costs. These can vary a lot, depending on things like: the age of the truck, the make and model of the truck, individual maintenance decisions, and the quality of the maintenance. You can search internet forums or ask experienced owner-operators to find out what kinds of amounts are normal for specific truck makes and models.
I recommend being cautious when predicting maintenance and estimating more than you think you will need. I also recommend setting aside a dedicated maintenance fund so that you’ll have the money ready when things go wrong (as they always do).
Tire expenses will vary also. Annual tire costs can vary from about $1,000 (which is average for many truckers) to as much as $4,000. Variations are due to things like: miles run, load weight, how many tires you have, types of tires you buy, and wear patterns of the truck. When buying tires, you should consider the cost per tire as well as the expected life of the tire to decide on the most cost-effective choice.
If you are an owner-operator who leases onto a carrier or is thinking about doing so, you should be aware that some carriers can get their drivers discounts on expenses like tires and fuel.
Insurance for a single truck can run anywhere from $5,000 to $10,000, although there are really no upper limits because you can always pay more if you want more extensive coverage. There are all sorts of insurance that you may either be required to get or may decide to get, including:
- Collision/comp insurance
- Bobtail insurance
- Cargo insurance
Unless you get it from a spouse or another source, you’ll also need health insurance. (You can technically go without it, but that’s not a good long-term plan as there are increasing penalties for that under the Affordable Care Act.) At this point in time, the average health insurance cost for an individual who is paying for it himself is about $3,400 per year. (Family plans will lower the per-person amount.)
In a few states, workman’s comp is required for individual proprietors, but in most it is elective and up to you whether you want it or not. If you do, this is an additional expense and can cost around $180 per month.
Food and drink
Many people are surprised to learn that food is one of the biggest expenses after fuel and truck-related costs. Eating restaurant and diner meals on the road can really add up in a surprising way. Overpriced snacks and drinks along the way don’t help either. Be honest with yourself about your spending habits when it comes to meals and snacks. Set out a budget and try your best to stick to that amount.
A pro tip: consider putting a refrigerator and a microwave in your sleeper; these can really help save you a lot of money over the long term.
Cost of finding loads
Sometimes you will need to pay costs associated with finding work. You may have to pay a percentage to a broker (in the 10-20% area) or to a load board site.
If you’re leasing to a company, they take a larger commission, but there are other percs which make up for this, such as:
- Money saved on not having to register as a carrier and other permitting
- Lower overhead due to discounts on fuel, tires, and other expenses
- Less time spent on paperwork
- Less time spent finding work
- A steady income since you don’t have to wait for invoices to be paid (which can sometimes take a long time)
Licenses, permits, emissions, tolls
Does your state have recurring business license costs? Are there certain permits or licenses you need for transporting certain materials? Are there tolls in the regions you’ll be running that will impact your routes? Are there some private scales that you’ll have to pay to use? Be sure to think through what kind of business you’ll be doing and all the costs you might run into.
You may have additional costs associated with emissions testing or new emissions laws. Some states (namely California) have more stringent environmental requirements than other states.
If you are traveling overnight and staying in places besides the cab of your truck, those lodging costs can be a significant expense.
If you’ve done the work in estimating your income and expenses, you can try to plug these values in our free Income Estimator to see what kind of per-mile cost and per-mile revenue you’ll be looking at.
If you are currently an owner-operator and you end up getting amounts from the Income Estimator that you think are incorrect, it could be a sign you’re overlooking an expense or two somewhere. (If you think the fault is on the our end, I’d love to hear any feedback you have.)
My name is Jason Forrest, and I’m the creator of Rigbooks. Rigbooks is a cloud-based software that makes it easier for small and medium-sized trucking companies to do their job. We’ve been around since 2010.
A little about me: I grew up in a trucking family and from an early age I learned about the day-to-day problems that truck owner/operators have to deal with. I was into computers and programming as a kid so over the years I helped write small computer programs that helped my parents run their company better. Eventually that led to the idea of putting all those tools together in one package. And Rigbooks was born.
Want more? Check out my free course...
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More resources for trucking business owners:
- What’s the difference between HVUT, Form 2290, and IFTA?
- "How long do I have to keep these?": FMCSA record retention for owner-operators and small fleet owners
- Top tax filing tips for owner-operators
- Tips for owner-operators with tax problems
- How are fuel surcharges calculated?
- Starting out with an owner-operator trucking business
- Owner-operator expenses: Fixed costs vs variable costs
- Understanding owner-operator expenses and costs
- Gaining half an MPG can put more money in your pocket than adding $90,000 in revenue
- Cutting fuel costs and improving fuel efficiency for Owner Operators
- Top truck-buying tips for owner-operators
- New versus used truck pros and cons table
- Buying a truck: Should you get a new or used rig?
- Preventative maintenance strategies to avoid major repair costs
- IFTA fuel-buying strategies: Where is the best place to buy fuel?
- Calculating your cost per mile
- Owner Operator Expenses - Fixed Costs vs Variable Costs
- How do I calculate IFTA
- How does IFTA work?
- How did IFTA start?
- What exactly is IFTA?
- Tracking miles for IFTA
- Fitness for the road
- Acronym cheatsheet for the trucking industry