Dollars & Sense

Knowing Your Cost-Per-Mile

In a number of EO articles over the past few months, we've talked about cash flow management, operating your business as a business and other economic basics.  And, according to the experts, one of the most important components of successful business and monetary management is knowing your Cost-Per-Mile (CPM).
 
Whether you're in a cargo van or tractor-trailer, you've got to understand what it costs to run your truck.  Knowing the Cost-Per-Mile is essential to running your business profitably. So many owner-operators are simply unaware of what it costs to run their truck.
 
There are a few prime reasons to be aware of CPM. First, all of your costs are directly tied to CPM. You can't accurately forecast your weekly or monthly net income unless you know your CPM. This includes your revenue, fuel surcharge, fuel costs, road & fuel taxes and other expenses.
 
The second reason CPM is essential is that it gives you a basis for comparison - current figures to past, to other owner-operators, and to industry norms.

A third great reason for CPM-awareness is in your daily operation.  You will often receive load offers that, at first glance, seem to be profitable. 

If you know just how much it costs to run your truck, it will enhance your decision making process and help you determine whether that load is in fact, a good choice.

If you don’t know your CPM, you don’t know whether you made money on your last load, and you don’t know what your next load ought to pay, either. You don’t know which expenses are urgent problems and which ones you can take in stride.  
 
CPM is a simple tool any truck owner can use to measure his operating costs. To figure your CPM divide your total costs by the number of miles you run. For example, if you spend $60,000 on trucking-related expenses in a year's time and you run 120,000 miles during that year, your cost per mile is 50 cents (60,000/120,000).

CPM = (fixed cost + variable costs) / miles
 
Once you know what your costs are, you can start taking steps to control those costs and that has a direct effect on your bottom line. Cost for operating a truck fall under two general categories - fixed costs and variable costs.

Fixed costs
Fixed cost expenses are those that you entail just through truck ownership. These costs are there whether the truck is in operation or not. These include your truck payment, insurance, licensing and registration, and taxes. Knowing your fixed costs will help you evaluate when it’s prudent to run with a lower paying load, which has no effect on fixed costs, or to sit and wait for a higher-paying load.

Expediting has more than it's share of idle days and these times of no revenue have to be planned on and prepared for.  Be realistic about this business and be aware that there are slow times through the year and that there can be substantial time spent waiting for loads.
 
Variable costs
The more miles you run, the higher your variable costs will be. These include fuel, tires, maintenance and repairs. Variable CPM should stay fairly constant unless something unusual happens, such as a fuel price spike or a high repair bill.

These figures should be readily available to you through comprehensive bookkeeping practices that the smart owner-operator already employs.

The example below is more appropriate for that of truckload trucking, but should serve to demonstrate how the CPM formula can work for you.

Monthly fixed costs
• Truck payment $1,550
• Insurance $475
• Federal use tax $45
• License fees and permits $100
• Income tax $685
• Clothes $50
• Worker’s comp $175
• Accounting fees $125
Total fixed costs $3,205

Monthly variable costs
• Fuel $2,080
• Maintenance $125
• Repairs $325
• Meals $350
• Tolls $35
• Tires $455
Total variable $3,370

Fixed costs $3,205
Variable costs +$3,370
Total costs $6,575

$6,575/10,000 miles = 66 cents per mile

Now that you know both the revenue and cost per mile, you can calculate profit per mile. Take your revenue per mile and subtract your cost per mile. That would tell you the average profit per mile.
 
The cost to operate your business is something you want to continually review. The more accurate your expense records, the more successfully you can manage your business.
 
You must be able to project needed revenue vs. expenses. Will you have enough cash flow? Are you within budget? Will you be able to qualify for a loan? Is your cost per mile creeping up each month?  If so, why?
 
Aside from using your calculations to determine the profitability of loads you can also use the numbers to predict future costs, analyze past performance and cost out equipment purchase comparisons. When it comes to being successful, you have to operate smart and use all the tools available to you. Consult your tax advisor for more information.
 
Obviously, taxes (and the timely payment thereof), are a key ingredient in running your business.  It's recommended that you use a taxpreparer or accountant/bookkeeper for this important task, preferably one who is familiar with trucking money matters.  And, a good accountant can save you money and assist you in achieving your money goals throughout the year. 

Good load or bad? CPM can tell you.
What might seem like a good load could turn out to be a loser. If you know your CPM is 65 cents, you’ll know at a glance that a load paying $1.10 a mile will net you 45 cents a mile.

For example, your carrier offers you a load that pays $1,000 for 850 miles, but you have to deadhead 210 miles in order to get to the pickup. Let us assume your cost-per-mile factor is 69 cents, it will cost you $241.50 out of your own pocket just to drive your truck to the pick-up location, and it will cost you another $586.50 (850 miles times 69 cents) to deliver the load, should you decide to do so. This leaves you with $172 for driving 1,200 miles.

This example clearly demonstrates the importance of the cost-per-mile calculation for the success of your trucking operation.

You can also evaluate leasing opportunities. If you know a company’s per-mile rate, you can tell whether your net pay will be enough for you to live on.
 
However, as a responsible business manager you should compare your cost-per-mile factor from month to month to determine :how your business progresses.