How important is knowing your Break-Even Point when you are a trucker?
I’m constantly saying, “You’ve got to know your Break-Even Point!” But is it that important?
According to Renee Cloud, of Clerical Business Solutions, a business management company providing business consulting & administrative support (virtual assistant services): “A number one rule for business is to know your break-even point when it comes to profitability. Many business owners pay a lot of attention to their profitability instead putting some focus on their break-even point. To tell if your business is profitable look at your break even point and your break even margin. When you know your break-even point on certain services, products and overall business operations, it’s the key to strategic planning, maintaining and increasing profitability in the long run.”
According to Charles Alexander at Volunteer State Community College and the Tennessee Small Business Development Center (www.tsbdc.org): “Knowing your break-even point is one of the most important pieces of information that a business owner should know. Whenever I ask someone if they know what their break-even is, I always get the answer of “I have a ballpark idea of what it is.” This is not good enough to make important decisions in your business such as hiring additional personnel, buying a piece of equipment, or offering a new product or service. You need to know exactly how much money it takes to break-even.”
If it is so important to know your business’s Break-Even Point, why does it seem a large number of truckers either don’t know what theirs is, or have the wrong figure?
I think it stems from lack of information, especially when most of these folks are thrust into being business owners. Most lease operators were offered the “opportunity” to make more money by leasing or owning their trucks rather than being a company driver. At the time it seemed like a no-brainer, because to the uninformed observer, by making three to four times what they were making as company drivers, there should be plenty of money “left over” after all the expenses had been paid. They would be making substantially more money. They assumed the information they were being given was correct, but they never checked the numbers by doing a Break-Even Analysis. The reason? They didn’t know what a BEP Analysis was, didn’t know it was important, or figured the trucking company’s accountants had already done one and it wasn’t necessary. There’s also another incentive called the Pride of Ownership. Many truckers are of such independent stock that they would give up some income to say, “That’s my truck.” Not a solid business decision, obviously, but one anybody who has owned or desired to own a truck can understand.
So what makes up a break-even point?
It’s made up of all the costs required to own and operate a truck. But many truckers only include a partial list of those expenses. It always amazes me when I ask a trucker what his Break-Even Point is, and he quotes me a per-mile figure. The problem is a per-mile Break-Even Point moves all over the map. Example: if a trucker’s fixed costs are $300 per day, his maintenance cost per-mile is 20 cents, his fuel cost is 40 cents per mile, and his truck moves one mile in a day, what is his per-mile Break-Even Point? It’s $300 and 60 cents. If the truck goes 100 miles in a day, his per-mile BEP is $3.60 per mile. The same holds true as you look at a week. Using $300 per day fixed cost and 60 cents per mile maintenance and fuel, if a truck travels 3,000 miles in seven days his per-mile BEP is $1.30 per mile; for 2500 miles in the same seven days, the BEP’s $1.44 per mile, and at 2,000 miles it increases to $1.65 per mile. So if I ask someone what his BEP is and he quotes me a per-mile figure, unless he qualifies it with how many miles it’s based on, this shows me he doesn’t have a clue. And if he can’t tell me his daily fixed cost and what his per-mile maintenance and fuel cost is today, he’s operating his business without all the facts he needs. Kind of like trying to drive a truck without wheels and tires. It just sits there and digs a deep hole.
If a trucker says his Break-Even Point is, say, 70 cents a mile, what does that tell me?
It indicates he is either quoting a number he heard from someone else, or he’s only using the cost of fuel, maintenance, and maybe his per diem. But what he hasn’t included are all the other costs that are required to own and operate a truck.
What are those costs?
Those costs include everything from the obvious to ones you might not think about.
The obvious ones are the truck lease payment or loan payment, insurance. workers comp (or occupational hazard), FHUT, cell phone, QUALCOMM, office supplies, labor fees, tolls, permits, parking fees, shower fees, lodging, tires, repairs, maintenance costs, Air Card fees, PrePass fees, fuel taxes, meals, tools, bling for the truck, paid claims, accounting fees. If it’s spent on the truck, for the truck or to keep the truck rolling, it’s a part of your Break-Even Point.
Which one is the most commonly missed by owner/operators?
Believe it or not, it’s the one expense that without it the truck can’t roll down the highway!
It’s the driver’s paycheck. Many owner/operators are under the misconception that their pay is what’s left over after all expenses have been paid and the reserves have received their deposits. The problem with this approach for the owner/operator is the times when there are no leftovers—something that’s happening with regularity right now—the driver and the owner both aren’t getting paid. This creates a terrible internal conflict, because if most company drivers don’t get paid they’d quit, but how does an owner/operator quit himself? There are experts in our industry who say if you’re an entrepreneur trucker, your pay is based on the profits left after expenses. In my opinion that is so wrong on many levels. Number one, profits are where you get the money to grow your operation. Two, if an owner/operator doesn’t calculate a paycheck for himself as a part of his expenses, he will either take too much from the trucking operation, weakening its capital for sustainability and growth, or he’ll never get a paycheck with any regularity because he hasn’t established a target at which to aim. Most truckers would rather die than miss a truck payment. The reason they don’t miss that truck payment is they’ve established a target amount, and they make sure it’s there when the payment is due. By including a regular paycheck amount for the drivers (themselves) within the Break-Even Point, just like that truck payment, they’ve established a target. If you’ve got a target and you practice enough, you will start hitting it. The more you practice, the more often you’ll hit it. [Side Note: Including a regular salary or draw in the Break-Even Point to the company owner even when he doesn’t drive a truck is also a great way to make sure your operation survives the difficult times.]
What’s the difference between the trucker who knows his true Break-Even Point and the trucker who either thinks he does, or has no idea how to calculate it?
It’s education. Lots of people go swimming without ever taking a swimming lesson, and they do just fine until they get into turbulent waters. Lacking the information they would have learned if they had taken lessons, their chances of survival are reduced substantially. The same holds true in trucking. As I have told all my students and clients, knowing how to operate a truck does not mean you know the business of trucking. While it is one of the components in a trucking business, it’s not the one that will create the foundation for a successful trucking operation. The trucker who thinks he understands the business of trucking but lacks the education and knowledge of basic business principles is the greatest threat to this industry, because the people who do understand these business basics will be able to take advantage of the ones who don’t. I see it every time a trucker goes lease or gets his or her own authority and within a couple of weeks they’re blaming low hauling rates on the brokers, shippers, or the trucking company. In fact the situation can be traced back to the point where they jumped into the trucking pool without a plan and without knowing how to calculate their Break-Even Point. If I’m going to jump into a lake I’m going to make sure one, I know how to swim, and two, what’s in the lake. Truckers need to know the cost and revenue projections of what they are getting into before they even start looking at a truck. My advice to anyone either struggling in this industry or thinking of leasing or buying a truck, don’t assume you know how to make it successful. Get the education and knowledge so you have all the tools required to be successful. Then move forward again by taking continuing education classes to stay on top of how things are changing.
Good roads and good loads, everyone.