Know your cost or pay the price

Lack of sufficient capital, inadequate management, and poor business planning are the top three reasons trucking businesses fail, according to research by the OOIDA Foundation. Knowing your cost of operations is critical to the viability of your business no matter when you enter the industry.

“We know that 25% of all trucking businesses fail within their first year of operation,” Andrew King, research analyst for the OOIDA Foundation, said. “By year five, over half will fail. This is true regardless of the economic freight cycle that we’re in, whether it’s up or down “

So, why do so many fail?

“A lot of new carriers don’t know their cost of operation,” King said. “If you can’t control your costs, it doesn’t matter how much money you bring in. Your chances to succeed are slim.”

As you approach cost of operations remember, this is not a money made business. It’s a money saved business.

Cost of operations 101

With that in mind, take a look at what your fixed costs are and what variable costs may be.

Below are a few helpful ratios and how to figure each.

Operating ratio

(Total operating expenses ÷ Total operating revenues) × 100

Working capital ratio

Current assets ÷ Current liabilities

Debt ratio

Total debt ÷ Total assets

Debt-to-equity ratio

Total liabilities ÷ Equity (assets − liabilities)

Very few enjoy extra paperwork, and even fewer probably care to spend the few extra minutes they have on math. However, the success of your business depends on it.

To illustrate how important cost of operations is, look no further than OOIDA’s Truck to Success course. The annual training is designed to provide critical information through step-by-step guidance for drivers interested in becoming an owner-operator.

Every aspect of the business is covered and cost of operations is not only heavily covered throughout the three-day training program, it’s one of the first topics discussed.

“This is a key principle that we teach in our Truck to Success seminar,” King said. “In fact, our first session is all about how to create a business plan and how to get a handle on your cost of operations.”

An owner-operator perspective

Gary Frederick is an owner-operator based in Sebring, Fla. He runs coast to coast, mainly to the Portland, Ore., area, with GNR Transport Inc.

He emphasized the importance of knowing your costs even more so these days.

“I’ve been in the business 35 years and have never seen a diesel market like this,” Frederick said. “Back in 2008, it was tough then, but there was a ceiling that you could see. My fuel bill just jumped to $4,000 in three weeks for the same trip.”

Adjusting your business when industry conditions necessitate is critical, Frederick said.

“You have to watch what you’re spending your money on,” he said. “Do you know how much it costs you for fuel right now? It’s day-to-day, almost hour-to-hour lately. I might have to take an extra load here and there for fuel money. Some drivers jump on every job because they have a truck to pay off. When that happens these folks don’t realize they are cheating themselves.”

Diesel price and effect

Diesel is the largest expense a driver will incur regardless of the state of the market.

However, with diesel prices higher than they’ve ever been in certain regions the time to implement a fuel surcharge into your business is now.

Tom Crowley, regulatory specialist with OOIDA Business Services, explains how cost of operations and fuel surcharge go hand in hand.

“Fuel surcharge is based on your cost of operations,” Crowley said. “What I try to get through to people is the fuel surcharge is part of the rate. When you’re booking freight and everyone is shooting these low-ball prices at you, how do you know what’s profitable for you? If you want to be around 10 or 15 years from now, you can’t think you’re making a profit, you have to know you’re making a profit.”

There’s not a “magical number” or national average for surcharges. However, it’s also not too complex to calculate.

If you based your calculations on $2 per gallon, then you can figure how much more your operations costs have to be with your fuel costs, Crowley said.

“This is something anybody out there can do,” he said. “It’s not complicated. It’s simple math. We’re not talking trigonometry. It won’t take you very long to figure out.”

It’s a marathon, not a sprint

As mentioned at the start of this story, trucking is a money-saved business.

Crowley expressed the importance of not taking the next step with your business before the time is right.

“The first thing people want is to have their own truck,” he said. “They want to just hop in their truck and go, and want someone else to do their billing, dispatch, compliance services and so on. It’s mandatory that you know each load you are hauling is for a profit. If you don’t know your cost of operations, it doesn’t take much to find yourself in a bad spot. There are many, many opportunities to fail, but not as many opportunities to succeed.” LL