Chances are pretty good you got into trucking to make money. Some carriers, though, continue to suffer through lean years, even when times are good. They are always running short of money, and never seem to have the financial leverage to get ahead, let alone expand.
There can be many reasons for this, but a primary culprit is not setting proper hauling rates. You may think that $1.65 per mile rate you charged is sufficient, but if it cost you $1.70 per mile to move that load, you’ve lost money. How can that be when you considered your time on the road, fuel and expenses? Chances are you left out some or all of the obvious, yet often forgotten, expenses. Things such as insurance, that building you own, employee salaries, unexpected repair bills from previous months, etc.
To calculate the proper hauling rate, and to ensure your organization’s financial future, you need to know your fixed costs, your variable costs, and salaries. And you need to consider all of them when calculating the rate.
Fixed costs are expenses that you must pay every month and do not change. These include insurance, vehicle or building leases or payments, necessary permits, employee health insurance, etc. Variable costs are those expenses that change month to month. These would include fuel, maintenance and repairs, taxes, driver expenses such as food, promotions, etc. Salaries are just that.
To calculate your minimum cost per mile – this is the rate you need to charge to break even – add up your fixed expenses for the month and divide by the number of miles your trucks drove that month. Do the same for variable costs and salaries and add them together to get your total cost per mile.
Remember, this base rate is what you need to charge so you don’t lose money. Because your variable costs will change month to month, this should be reviewed regularly. If you had a large repair expense, for instance, the rate may need to bump up slightly in coming months to pay for that.
If you want to make money, determine additional needs you may have (such as adding equipment, staff expansion, and the cost to do so) and your desired profit margin. Do the same calculations with these numbers and add that answer to your base rate. This now gives you a range within which you can negotiate.
Say, for instance, you determine your base rate at $1.75 per mile, but with your other needs and desired profit margin, you would prefer a rate of $2 per mile, this gives you a 25-cent range to use in negotiations with the shipper. If you are looking to make a 20% profit margin on each load, simply take your minimum base rate, in this case, $1.75 per mile, and multiple it by .2. The result, $0.35, is added to the $1.75 and the rate you want to shoot for in negotiations to make a 20% margin is $2.10 per mile.
Knowing this information can help you in negotiations. You can ask the shipper for $2.10 per mile, but you know you can settle for a little less, giving you the opportunity to seem flexible to the shipper and perhaps securing future loads because you were able to give them a good deal.
If you find that your cost per mile is not competitive, you need to look at ways to reduce it. The American Transportation Research Institute (ATRI) is a place to start. The research firm just released its 2017 Operational Costs of Trucking, which looks at how much it costs carriers to do business. While every operation is different and larger operations will have lower costs, this data can serve as a baseline comparison for your own operations. For 2016, ATRI found the following costs per mile for vehicles:
- Fuel costs: $0.336
- Truck/trailer lease or purchase payments: $0.255
- Repair and maintenance: $0.166
- Truck insurance premiums: $0.075
- Permits and licenses: $0.022
- Tires: $0.035
- Tolls: $0.024
The organization also found that it costs carriers $0.523 per mile for driver wages and $0.155 for driver benefits. In total, ATRI said that for 2016, the operational cost per mile per truck was $1.592.
While smaller fleets and owner-operators will have different cost structures, the ATRI data provides a starting point. For instance, a smaller fleet that holds onto vehicles longer may have a higher maintenance cost per mile. The fleets surveyed in the ATRI report held their tractors an average of 5.5 years.
Now that you know your cost per mile, it’s time to determine your revenue per mile. Simply take your revenue for the month, divide by the number of miles driven, and that is your per-mile revenue. The difference between your per-mile revenue and per-mile cost is your profit per mile.
In some instances, you may choose to accept a load at a lower rate than your base rate, but that money will need to be recouped along the lane either through a higher rate on a shipment or a general rate increase. The average of all your loads over a month, a quarter and a year, need to meet or exceed that minimum rate. If your monthly per-mile revenue is below your per-mile cost, you lost money, and will need to consider a rate increase.
Knowing your minimum shipping rate can help you not only haul more profitable loads, but it can also identify cost trends or areas from which to cut when the tide turns against you.
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