One of the most frustrating parts of running a trucking business is seeing the money go out. At first, it was exciting to see the big checks coming in, but now you already know how fast that money will be right back out the way it came.
This is because trucking is a low margin business. The expenses are pretty close to what you earn in revenue. Most owner operators expect to keep 5-10% of their earnings as profit (after counting driver wages).
The big carriers are on an even tighter margin, and typically will only see 2-3% profit margin on their revenue. They have a lot more overhead in way of employees and they can’t be as choosey on which loads they haul since they have to keep their trucks moving all the time.
A frustrating consequence of having such small margins is how much revenue you have to earn to make up your profits. If your business has a 5% margin, you have to make $20 in revenue for every $1 in profit.
That means to earn an extra $1000 in profit, you have to add a mind-boggling $20,000 to your revenue. $19,000 of that disappear as expenses of your business. No wonder it feels like you can’t get ahead…
If you slightly change your way of thinking about this, there’s some good news. Adding revenue isn’t the only way to improve your profits, you can also cut costs.
Here’s where the good news comes in.. if you can cut costs by that same $1000, you performed the same work as adding $20,000.
That’s right, it’s the same thing as adding $20,000 revenue to your business.
Which costs to target first
Anytime you want to optimize performance, it’s best to target the biggest contributing factor. Why? Because even completely eliminating the smaller expenses doesn’t move the needle much, while making small improvements to the bigger expenses will. It’s easier to make a small improvement than a big one, so you should target the bigger expenses first.
With any trucking business, fuel is the biggest expense. The only reason you shouldn’t target it first, is if you have already done a lot of work improving your fuel mileage. You’d still probably want to take one more shot at it, but then move onto the next biggest expense.
If fuel costs $2.50 per gallon, and you average 5 mpg, you are paying $0.50 per mile to run your truck. If you run 100,000 miles in a year, you are spending $50,000 on fuel.
If you can improve your fuel mileage by just 10%, to 5.5 mpg, your costs will be $0.4545 per mile.
That brings your fuel costs for the year down to $45,454, or a savings of $4,546. To increase your profits by the same amount by adding revenue, you’d have to add $90,920 to the top end. Not bad for just adding half a mile per gallon, right?
Once you have tackled improving fuel mileage a couple times, just move down the list of your biggest expenses and try to lower the costs. Try to renegotiate your insurance rates or change the payment terms. You might not have been able to pay for a year up front last year, maybe you can save up for next year.
This will be a lot easier than trying add $20 per $1 of that insurance cost.
Once you get down to the small stuff and you can’t cut down the costs or eliminate them, then go back to the top of the list and start over.
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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?
- Simple rules for maintaining long-term profitability in your trucking business
- 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