Part 1: Know your Numbers
I worked for 10 years with one of the top management consulting firms helping clients make their businesses more profitable. This included working for heavy-duty truck manufacturers, semi-conductor makers, lumber mills, satellite builders, you name it. I’m now working with trucking fleets to help their businesses make more money and many of the same lessons from my consulting days still apply.
At FR8Star, we are totally focused on building tools to help small truck freight carriers make more money. So, in this same spirit, I thought it would be useful to share what I have learned about profit maximization from my consulting days. This article is the first in a series where I will cover in detail a battle-tested approach to bringing dramatic improvements in profits to any company.
Think like a management consultant
So how do you think like a management consultant about your trucking business? The first step in profit improvement is always to truly understand the components that make up your profit, namely: revenue and cost. We of course care about these things because when you subtract your total cost from your revenue, what’s left is your profit – the money in your pocket at the end of the day.
Of course you know your revenue – that’s the total amount invoiced to your customers – but do you have a clear picture of your costs? Too many businesses (not just in trucking) make the mistake of not clearly distinguishing between fixed and variable cost and can make bad mistakes as a result. I once worked with a sawmill that was spending more (in variable cost) on every board it produced than the price it could sell it for. As we said, they were “stapling dollars to their lumber”. If you are doing this, then ramping up higher volumes of production only loses you money faster! On the other hand, I had a truck maker client that was selling trucks to some customers with a contribution margin (revenue minus variable cost) lower than their fixed cost per truck. In the short term this was OK as the volume still helped cover overall fixed costs. But long-term if your total costs exceed your revenue, you die. In both cases, the key to starting an improvement program is measuring the right things so you know what to fix.
That takes us to trucking and the need to know your numbers. If you only kept track of two things in your business, these would be the two things to focus on: 1) Target Price per Mile and 2) Variable Cost per Mile. Yes there are other things you care about, like truck utilization, driver turnover, safety, maintenance cost, etc. But if you start by focusing on these two basic yardsticks, everything else flows from there. Let’s start by looking at these two numbers.
Calculate Total Cost per Mile
To start, you need to calculate your Total Cost per Mile. This number is critical as it determines whether you make or lose money on your business overall. Finding this number is easy. Total up all your costs from the past year and divide by the number of total PAID miles your trucks drove. This should be truly ALL of your costs including: truck financing payments, fuel, driver pay, licenses and fees, your office rent, back-office staff, etc. Don’t forget to include your salary as well, but don’t include money you took out of the business as profit. Note that you should divide your total costs by number of PAID miles, not TOTAL miles because deadhaul miles are part of the cost of your operations. Every load involves driving some amount of unpaid miles that still rack up costs for fuel, tires, maintenance (and possibly driver pay). By including all costs but dividing by paid miles, you get a cost per mile number that builds in your average deadhaul distance.
The resulting Total Cost per Mile number is critical as it tells you how much you need to charge on average across all loads in order to break-even as a business. Make one modification to this number by adding in your desired profit dollars per year divided by total paid miles. You now have Target Price per Mile that you can use as a guideline for pricing loads. Of course you won’t always be able to price above this number and sometimes you can price significantly above it, but on average you will need to bring in this amount per mile if you are going to hit your profit goals.
Determine Variable Cost Per Mile
Total Cost is made up of Variable Cost and Fixed Cost. Fixed Costs are the costs for your business that happen regardless of whether your trucks are operating. These costs include your truck financing payments, your office rent, insurance, back-office staff, etc. Variable Costs are costs that only happen when your truck is driving: fuel, tires, driver pay, maintenance, toll and fees, etc. To get Variable Cost per Mile, total up all your expenses that you incur when your trucks are moving and divide by the number of PAID miles driven over that time period. Like with Total Cost per Mile, this will build in your average deadhaul length as part of your costs.
It is very important to know what your Variable Costs are as these are the costs associated with taking on a job – unless you want to be burning dollars out of your exhaust pipe, you had better get paid above your Variable Cost. Note in some cases, it might be reasonable to take a backhaul below Variable Cost if when averaged with the fronthaul you are making your Total Cost per Mile number. This can happen in poor backhaul markets where you charge a pretty penny going in because you know it’s going to be murder getting out. But if there isn’t a compelling reason to get into that situation, you need to absolutely avoid taking loads below Variable Cost as you are simply taking money out of your pocket and giving it to the broker or shipper. Chances are if the rate is below Variable Cost for you, it is for any other fleet as well – let someone else take the bullet.
Let me add one more caution here. I have heard many fleets claim that they will run empty instead of taking a too-low rate from a broker. I understand the emotional appeal of not giving into an unreasonable demand, but just remember that running empty is the same as taking a load for $0 – that is definitely below your Variable Cost.
Take Action: Use Your Number
Having these two numbers in mind now, you have the basics you need to steer your business. As you bid for loads and start to build trips, you are aiming to keep the average rate you are getting above your Target Price per Mile and on any one leg you want to be above your Variable Cost per Mile. Tracking your revenue per mile compared to Target Price per Mile week to week can tell you in a very simple way how well your business is doing. Don’t worry if some weeks are above and some weeks below as long as the average over the course of a month, quarter and year is at or above your target. If you see a persistent trend down then this is a signal that something is going wrong.
Having a grasp of these numbers is also the starting point to begin to make improvements to your operations. In the rest of this series of articles we will go through step by step ways of looking at each part of your business so that you can improve your numbers, both by getting more revenue per mile and decreasing your cost per mile.
In the next article, we will tackle improving your revenue per mile, including the ever-fun topic of Pricing. Make sure to sign up for this newsletter to get the next installment.
Until next time…