As a business owner, your ability to survive and thrive is as much about managing costs as it is about generating revenue. You, as the chief financial officer, must be concerned with rising costs, even if revenue is not increasing.
It can be difficult to understand and reduce costs. Understanding the basic principles of operating cost can save you thousands of dollar a year.
A penny earned is worth $1,000. An owner-operator saving just one penny for every 100 miles driven in a calendar year will save $1,000.
Costs do not remain the same month to month. For example, if you drive 9,600 miles one month and then 10,000 miles the following month, the costs will differ. If you drive 9,600 mile in a month and your tractor payment is $1850, you will pay 19.3 cents a mile. If you drive 10,000 miles per month, your tractor payment is 18.5 cents. This is a major fixed cost when paying off a truck.
The cost of fixed costs does not decrease over time. However, you can reduce the cost per mile if you drive more miles. The difference per kilometer is only 0.8 cents, which may not seem like much, but keep in mind the “one penny saved rule”.
Every dollar you save on costs will contribute to your profit.
Costs are not only measured in terms of miles. The 10,000-mile-month example above results in a lower price per mile. As the cost per mile decreased, the revenue for driving extra miles increased — a double benefit.
Fixed costs and variable costs
A fixed cost is already determined and does change from one month to the next or week to another. A fixed cost is any expense that is defined by time, such as a tractor payment or insurance payment. This cost will remain the same whether you drive your truck 600 miles or just one mile. It is a fixed cost that must be faced every day, 365 days a year.
The cost of driving is a variable cost. Examples include fuel, tires, and maintenance. The majority of variable costs will be the same for every mile that you run. These are the costs of distances traveled as well as other items required to move your truck the distance you need.
Calculating fixed and variable costs
In the hypothetical example below, an owner-operator leasing to another entity could show a variable of 79 cents a mile and a fix of $115 a day. This chart shows how to apply variable and fixed costs. Assume that the leasing carrier pays $1.40 per mile.
In Example A, because the operator could not break even, there was no money to pay for driving or cover personal expenses. In Example B, an operator makes a modest profit and has a small amount of money left over to pay for driving. In Example C, after paying for all expenses, the operator still has money left to save and retire.
Note how the fixed cost per mile has decreased in each successive example.
Where does the money go
It is helpful to keep track of all costs, and their share of revenue. This will help you determine if any part of your business is out of the ordinary compared to others. This can be useful for both cost-cutting and business decisions.
Based on the averages for clients of ATBS from December 2023 onwards, here is the percentage of revenue that a lessee should expect to spend in key expenses:
- Fuel: 30.8%
- Truck Payment: 19.1%
- Maintenance: 6.6%
- Insurance: 4.5% including physical damage, bobtail, and occupational accident premiums
- Licenses and permits: 2%
- Cell phones and other communication: 1%
ATBS clients earn an average of 36.6 cents per dollar of gross revenue. This means that 63 cents from each dollar earned must be used to cover essential business expenses. Remember this the next time you are tempted to spend a large settlement check.
If you are paying yourself less than a quarter of your revenue, then take a close look at your books. It’s possible that one or two of your costs are out-of-control, or that your revenue is too low.
[ Related: How you can move equipment financing terms in your favor]