If you’re an owner-operator or a small trucking fleet manager or owner, it’s a must that you understand the costs of operating your business. It’s not an extra bonus that’ll get you a little extra money; it’s what separates the wheat from the chaff in this business. The guys who never get around to studying and analyzing their costs are the ones who either don’t make it very long, or who don’t make much money.
So this article will be a quick introduction to some basic ways to think about your trucking costs. If you’re new to thinking about your costs, this should help you get a grasp of what to be thinking about, at least for the big picture.
Fixed and variable costs
So, to start with: there are two main categories that all your costs are in:
- Fixed costs
- Variable costs
Fixed costs are the expenses you have whether you’re driving your truck or not. Examples of fixed costs include:
- Truck/equipment loan payments
- Insurance premiums
- License fees
- Permit costs
- Accountant costs
- Cell phone payments
Truck mortgage payments and insurance payments are usually the biggest fixed costs.
Variable costs are the expenses you pay when you drive your truck. The amount you spend increases directly along with the amount of miles you drive. Examples of variable costs include:
Driver pay can fit into either fixed or variable, depending on how it’s calculated. A flat salary would be a fixed cost, and a per mile pay structure would be variable.
Fuel and driver pay are the highest variable costs, depending on the cost of fuel.
Below, you can see a couple graphs that visually show you the difference between fixed and variable costs. One stays the same, no matter how many miles you’ve driven; the other goes up. Pretty simple.
Why is this important?
Okay, so there are fixed costs and variable costs. What’s the big deal about that? Why is that important?
It’s important because it lets you understand what’s important to your business.
First, once you add up all your fixed costs (and do so in a careful, complete way), it will let you know, at its core, the daily expense of running your business. Doing this helps you in several ways:
- You will know (not be guessing) how much waiting for a job is costing you
- You will know how important it is that you take a job versus waiting for a potentially better one
- Seeing all your fixed costs in one place might give you ideas on how to reduce them
Keeping track of your variable costs helps in similar ways:
- You’ll know exactly how much you are spending on the road
- You’ll get ideas on how to reduce those costs
And comparing your fixed and variable costs gives you insight into your business. You understand it all better and know what the important areas are to focus on. You’ll know what jobs are profitable. You’ll know that you can wait for a bigger job a few days away because your per-day fixed costs are maybe not as big as you’d imagined. You can figure out how much a deadhead will cost and make a smart, informed decision and not just be flying (driving?) by the seat of your pants.
Reducing fixed costs
There isn’t a lot you can do to reduce your fixed costs, but it is possible. You can:
- Try to lower the interest rate on your truck loan (not always easy or even possible)
- If you’re buying a new truck, study up on ways to save money on that purchase
- Shop your insurance to reduce the premiums
Another way to reduce your fixed costs is to run more miles. Well, this doesn’t technically reduce your fixed costs, but as the number of miles goes up, it does reduce your per-mile expenses. Your fixed costs stay the same, so the cost-per-mile decreases. You can see this illustrated in the graph below.
Reducing variable costs
There are lots of things you can do to reduce variable costs. This is where attempting to cut costs really pays off big, as there are so many things you can do.
Examples of areas where you can focus your efforts:
- Increasing fuel mileage (driving habits, tire rolling resistance, more aerodynamic parts)
- Decreasing maintenance costs (better preventive maintenance, better quality parts, better purchasing decisions)
- Knowing the best strategies for fuel-buying on long trips
- Preparing your own food on the road
- Planning out lodging and dining locations to save money
There is basically no end to improvements you can make on the variable costs side. And, you probably already know trucking is a small-margin business–meaning that even tiny improvements you can make to variable costs will boost your income big-time.
Okay, that’s it for our introduction to fixed and variable costs.
If you want to go more in-depth on these kinds of costs, check out this article ‘Understanding owner-operator expenses and costs.’
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 run their business while keeping organized. 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.
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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