Got the right numbers?

By Timothy D. Brady

Many truckers and carriers are barking up the wrong tree when looking to solve the challenges they face as truckers. Look at the facts. It’s true that regulation after regulation is being piled on both truckers and carriers by the FMCSA. (Many of them, in my opinion, inflict an unnecessary burden, making conducting a trucking business in a profitable manner more difficult.) Nevertheless, the fact is, if you’re a trucker and/or a carrier, every other trucker and carrier is having to deal with the same rules, which makes a level playing field of sorts. 

It’s important to stay on top of developments concerning new regulations. Things like being sure you review any proposed rule during its comment period, then post your alternative solutions as a comment on the page at Regulations.gov. Continue to communicate to your Congressional Representative, Senator and legislators your concerns or objections to proposed or current rules. However, when all is said and done, we’ll be waiting for the slow-moving wheels of government to get to a point where they reverse this over-regulation feeding frenzy they're on. 

As trucking businesspeople, we need to spend our time coming up with ways to thrive in this industry while keeping the regulatory mosquitoes off our backs and out of our wallets. This is best done by developing better business skills that take the sting out of these regulations. The trucker and carrier who focus on their business rather than complaining to other truckers on things they cannot change overnight will be the truckers and carriers who grow and succeed in the future.

One trucking business practice that befuddles many in the business community outside of trucking is the focus on how much money is paid per mile. Any business professional who understands the basics of business within or outside the trucking industry knows that ‘per mile’ is the wrong focus when it comes to developing a revenue growth strategy. 

To explain: Where many truckers fail is, they focus on the rate they're paid per mile rather than on the total revenue they need to generate per month and quarter. The other problem is most truckers who focus on the per-mile rate look at a single static rate as what they anticipate receiving. The problem with this approach is that the cost per mile is influenced by several factors: 

• Total distance to be traveled from destination to destination
• Total elapsed time from destination to destination
• The cost of fuel
• The cost of maintenance, tires and repairs
• Load-specific costs like tolls, labor, pilot cars and the like
• The individual truck’s fixed cost per day.
  
  
  

This requires knowing the figures for these different cost categories (fixed cost per day, operational cost per mile, fuel cost per mile and load-specific costs per shipment on the truck). And because of the time factor created in your fixed cost per day; the shorter the distance and the greater the time involved, the higher your cost per mile. The longer the distance the load goes and the shorter the time required, the lower your cost per mile. So just a 500-mile difference over a week's time can cause the cost per mile to go up or down from 20 to 30 cents per mile. Too few miles over time, and your costs can easily exceed your top static hauling rate per mile figure. 

Let’s look at a series of different distances that could be covered in a single day. 

A truck has a $300 per day fixed cost including owner salary; maintenance, tires and repairs cost another 15 cents per mile and fuel is 65 cents per mile. 

Using these numbers we’ll answer the following questions. 

If a truck runs one mile in a day, what is its cost per mile?
Cost per mile is $300.80 

If the same truck runs 10 miles, what is its cost per mile?
Cost per mile is $30.80 

If the same truck runs100 miles in a day, what is its cost per mile?
Cost per mile is $3.80 

If the same truck runs 600 miles in a day, what is its cost per mile?
Cost per mile is $1.30 per mile

 These examples show that as miles increase, cost per mile decreases; as miles decrease, your cost per mile increases. 

So if you ran a 100-mile load for $2.50 per mile, the trucker loses $1.30 per mile on that load. Even a 175-mile load would cost 2.51 per mile, meaning he’s losing a penny a mile. Let me explain. At 80 cents per mile for fuel and operational costs, the trucker’s cost would be $140 (.80 x 175) plus his $300 per day fixed cost. These combined equal $440.00. The trucker’s revenue for 175 miles at $2.50 per mile equals $437.50, or short $2.50 from even covering his costs. 

It’s true, and very important, that a trucker needs to know his cost per mile. But it’s only one factor, and he can only use the variable operational and fuel costs to calculate it. His fixed costs have to be calculated by time in order to provide the correct information. It's a time and distance formula. If a trucker tries to combine fixed costs as a per-mile calculation without first figuring the time required, his hauling rate will be incorrect. Your final answer can be a per-mile number for the hauling rate as long as you've included the time factor in the mix on your fixed costs. 

Let’s look at this another way. Many lease operators and company drivers are paid by the mile. Truckers paid in this manner know for a fact that it’s all about miles. If the trucker doesn’t achieve a certain number of paid miles in a week, a month or a quarter, he or she won’t make the necessary funds to cover the needs at home.  Why this occurs is because of the same math dynamics an independent trucker or small carrier deals with concerning fixed cost and time.  We all know when the truck is sitting still, those fixed costs keep adding up. But many of us miss that the same dynamic applies to someone paid a static rate per mile when they don’t reach critical mass with their miles over time. As demonstrated in the cost and distance problems above, when you ignore time, whether in calculating a hauling rate or figuring what your pay needs to be, you’ll fall short of the needed revenue or pay.

Here’s an analogy to help understand why time is more critical than miles.

Figuring by the mile is like playing basketball on a regulation court with a ping-pong ball and a 12-oz. plastic cup. It’s very difficult to continually get the ping pong ball in the cup from the free-throw line because the target or goal is too small and too far away for you to get very good at hitting the cup. Now, if you have a regulation-size basketball plus a regulation-size basket, with practice you can be hitting all net from the free-throw line on a fairly regular basis. The larger the goal, the bigger the target, the easier to hit. 

In trying to figure your freight revenue or pay by the mile, you're playing the trucking game with a ping pong ball and plastic cup. All you end up doing is dribbling down the highway. This is where many truckers and micro-carriers are befuddled when they say they’re hitting their static rate per mile, but are falling short of the revenue they need to pay their costs or make a profit. They’re focused on the wrong numbers. 

Timothy Brady © 2012     Contact Brady through www.timothybrady.com/contactus
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