- Fixed Expenses Are Those That Go On Whether You Run Or Not
- Your “wheels” are a huge investment – the key is to keep them rolling!!!
- The other major fixed costs involve your office / shop and operations / support people.
Many of your major fixed expenses are paid on a monthly basis – and your people weekly. A change in utilization dramatically affects your FIXED cost per mile (CPM) and your bottom line.
What follows is a review of the fixed expenses in a typical over-the-road Class 8 operation and projected monthly costs, along with some general comments.
This approach will help you project your “cash flow” planning dollars. It will most probably vary somewhat from your tax number projections, due to depreciation, other deductions, etc. A rule in any business is that “You need cash flow first to get to profitability.”
BASIS OF CALCULATIONS
For ease of showing the relationship of monthly dollars to CPM, we have used an industry average utilization of 8,000 miles per month and calculated the resulting CPM. If your business receives weekly settlements with deductions, simply multiply those dollars by 4.33 weeks per month to get to your monthly dollar projections.
We suggest using this information to think through your own operations, when looking at contracts, and when assessing how an increase in utilization impacts your CPM and profitability.
- Tractor Payment – This is your largest fixed cost, unless your equipment is significantly paid down or paid off. Most lease-type arrangements are totally deductible. Otherwise, you deduct interest and depreciation. A new premium tractor today without a trade or buy-down will cost about $2,000 per month ($115,000 for 6 years @ 8% interest). At 8,000 miles per month, this is $0.25 per mile.
- Trailer Payment – Many of you who are leased to fleets will not have this expense as it is rolled into your contract. For those of you operating with your own authority or with a fleet where you use your own trailer, the financial issues are the same issues as with your tractor. A new van or flat trailer today can cost from $450 per month ($25,000 – same terms) versus a new reefer trailer from $1,000 per month ($55,000 – same terms). Again just divide the monthly expense by 8,000 miles per month to get your CPM, in this case $0.06 up to $0.12 per mile.
- Licensing / Permits – This cost varies with the base plate State and how much you operate in each State. Contractor fleets may either include these in their contract or deduct part or all of the costs over time. For planning purposes, a typical annual cost for an over-the-road company is about $2,000 per year. Your costs may be different, depending on where you run. Trailer plate costs are relatively inexpensive as compared to the tractor, again varying by State. For 8,000 miles per month, this CPM is $0.021 per mile.
- Federal Highway Use Tax – While the 2290 is only $550 per year, it is needed for licensing and is your responsibility. This costs out to be about $46 per month or $0.006 per mile.
- Liability / Cargo Insurance – If you operate with your own authority or with some fleets, these coverage’s are based off of revenue, are really variable expenses, and are addressed on that page in our site. Some fleets, however, fix this cost at a weekly or monthly rate and deduct it on settlements. In addition, others offer “bridge” policies at a fixed cost. Typical monthly costs in these cases are up to $400 per month for liability and $100 per month for cargo. This costs out to be up to $0.06 per mile.
- Collision / Physical Damage Insurance – This is based off of your equipment value. While some call this a variable expense because your equipment value changes over time, it is best to consider it a fixed expense, as you must pay it whether you run or not. Typical annual rates for a tractor range from 3% to 4% of your insured value. The new truck example as noted previously ($115,000 @ 3%) would be about $3,500 per year or $2290 per month. This CPM at 10,000 miles per month is $0.036 per mile.
- Bobtail Insurance – When you purchase liability insurance under your own authority or through a contractor fleet, bobtail is included. If the contractor fleet provides liability insurance in the contract, bobtail insurance is usually required. Bobtail insurance is often a catch-all description for non-trucking liability (NTL) up to more inclusive programs, with costs varying from $40 to over $100 per month. You need to talk to your contractor fleet to make sure you have the proper coverage. This CPM at 8,000 miles per month is $0.01 per mile.
- Health / Life / Disability Insurance – While this may be considered a personal-type expense, it is an important part of your risk reduction strategy – and becoming mandated depending on the company size. Disability is also covered in part under Workers Compensation (below). These costs vary with your personal considerations, but are a monthly on-going expense. Average costs can vary from $200 per month for a young individual to $1,000+ per month for a family. This CPM at 8,000 miles per month ranges from $0.03 to $0.125 per mile.
- Retirement Programs – This is another cost that should be addressed in your planning. Most tax and financial planners will recommend you put back at least $2,000 per year. This is $167 per month or a CPM of $0.021 per mile at 8,000 miles per month.
- Workers Compensation – For those operating with your own authority, you are not required to have this insurance unless you have employees. Some fleets do require that you have insurance through your State Workers Compensation Authority or a substitute Occupational Accident (OCAC) program. Different individuals, companies and States may differ on what type policy is proper for your circumstances. You need to ask what is appropriate for your operations. OCAC policies can average $150 per month while State programs can be double that. Using $150 per month at 8,000 miles per month, the CPM is $0.019 per mile.
- Fixed Office Costs – If you operate with your own authority, this includes many of the administrative costs as listed on the revenue page. For those with their own authority or contracted to others, this might include what you pay a spouse / relative, facilities costs, etc. For planning purposes, we estimate these costs at an average of $1,500 per month, or $0.19 per mile for 8,000 miles per month.
LOOK AT THE EFFECT OF UTILIZATION ON COST PER MILE
Add up these numbers up at 8,000 miles per month
Tractor Payment – - – - – - $2,000 / month OR $0.25 / mile
Trailer Payment – - – - – - – - $500 / month OR $0.06 / mile
License / Permits / 2290 – - $200 / month OR $0.02 / mile
Liability / Cargo – - – - – - – - $600 / month OR $0.06 / mile
Collision / PD / Bobtail – - – - $325 / month OR $0.036 / mile
Health / WC / Retirement – - $1,000 / month OR $0.125 / mile
Office Costs – - – - – - – - – - $1,500 / month OR $0.19 / mile
- OWN AUTHORITY FIXED COSTS – $6,125/ month or $0.766 per mile
- LEASED TO FLEET FIXED COSTS – $4,025 / month or $0.50 per mile
AND just increasing utilization 100 miles per week (<20 miles per day) gives us the following:
- OWN AUTHORITY FIXED COSTS – $6,125 / month or $0.726 per mile
- LEASED TO FLEET FIXED COSTS – $4,025 / month or $0.477 per mile
Try this exercise on your fixed costs. The results are huge.
THE BOTTOM LINE
- Whether you are operating with your own authority or through a fleet, all parties have an interest in maximizing utilization, as the mutual benefits are huge. Even if you are leased to a fleet, you benefit more than the fleet does because your fixed costs are higher than theirs.
- Utilization has a bigger effect on your profitability than any other aspect of your business – RULE OF THUMB – 100 MILES PER WEEK AFFECTS FIXED COSTS AND YOUR PROFITABILITY $0.02 PER MILE (AT LEAST)
- Lowering your fixed costs also lowers your CPM. Since your largest fixed cost is your equipment, financial planning may help you lower your interest rates and payments. Check out our equipment-financing page for tips that may help with that.