Do the Math: Business success is built upon knowledge

Do the Math: Business success is built upon knowledge

How do I recommend you determine your hauling rates? Use a per-day rate that includes your profit margin, and add an operational rate per mile figure that reflects your operational costs. You then add any load-specific costs like tolls, labor and permits on a per-load basis. —Tim Brady

We’ve gone through another challenging winter in trucking, made worse this year by very low hauling rates and limited amounts of freight. All of this is compounded by the adverse weather slowing down everyone’s progress with delays of one, two, three or more days.

And, yet again, many truckers who charge by the mile are wondering why so many loads are money losers. It’s all about time: the longer the period required to load, transport and unload, the greater the cost to the truckers themselves. With all the HOS stipulations on the 14-hour clock, time is the greatest enemy of a trucker today.

This is why charging a per-mile rate doesn’t work. Sit for a day on a 1,200-mi. run and your cost per mile increases by around 25¢; for two days, it’s 50¢; for three days, it’s 75¢; and so on. Even worse, on a shorter run like 600 mi., your costs still increase by 50¢/mi. per day.

How do I recommend you determine your hauling rates? Use a per-day rate that includes your profit margin, and add an operational rate per mile figure that reflects your operational costs. You then add any load-specific costs like tolls, labor and permits on a per-load basis.

For example, let’s say your fixed cost per day is $400. Add that figure to your profit margin of $400/day for a total of $800. Your operational cost is 50¢/mi. You’ve gotten a 1,200-mi. load that’s going to require three days to complete.

  • $800 x 3 days = $2,400
  • 1,200 mi. x 50¢ = $600
  • Your rate is $3,000 for this load.
  • If it took four days, your rate would be $3,800.

But does this work during the slow times?

Understand the market

All rates are dependent on time of year, type of freight, and truck-to-load ratio. You won’t always get your top rate and sometimes, due to circumstances beyond anyone’s control, you’ll need to accept a load below your break-even point to get to an area of higher-paying freight. Try to anticipate this and charge a premium going in to cover some or all of the cost in coming out of a low-freight, low-rate area. This does not work all of the time.   

That’s why it’s very important to have a list of brokers with whom you’ve forged positive business relationships. Ideally, work on the relationships with brokers who are willing to work with you to get the very highest rates possible and who are as interested in your success as their own.

Using numbers from the example above, you can also figure your break-even point for a load by removing the $400/day profit margin and calculating your rate using only the fixed costs per day. Your fixed costs need to include the driver’s pay and all office expenses, including owner salary; however, taking a load at the break-even point still ensures that you’re covering all the costs to operate the company, including owner and employee salaries.
The break-even point on the example load previously mentioned  is calculated like this:

  • $400 x 3 days = $1,200  
  • 1,200 mi. x 50¢ = $600
  • The break-even point on the load is $1,800 for three days.
  • Your fourth day break-even point would be $2,200.
  • Your rate range on the load (from break-even point to maximum needed profit) would be $1,800 to $3,000.

Cultivate regular customers

It’s important to develop a combination of direct-ship customers and dedicated broker customers. Use an occasional load board shipment as a backup if the load plan doesn’t work with your customer or dedicated broker loads.

Develop specific freight lanes for each driver and truck to operate in so you have a good idea from week to week what each driver will be doing for the month ahead. Load boards are your last resort. That’s usually the lowest-paying freight (discounted wholesale freight). Dedicated brokers are considered wholesale freight while direct-ship customers represent retail freight.

When determining your hauling rate, it’s important  to include the length of time necessary to complete a load from destination to destination. You must take a hard look at your time (and miles) from the point of last delivery of the previous load to the delivery  point of the current load.  

To receive the highest possible hauling rates for a load, you must have the following in place:

  • Know what it costs to operate both in dollars over time and dollars over miles.
  • Know what your per-day profit margin must be to sustain and grow your business.
  • Develop strong business relationships with freight brokers who understand what you need to earn and then will work with you to get loads that provide that revenue.
  • Calculate your rates based on the time required to complete the load plus the miles from destination to destination.
  • Develop specific freight lanes for each truck and driver to attain the highest revenue return.
  • Be prepared to negotiate within your hauling rate range by knowing the truck-to-load ratios of the areas within your freight lanes.
  • Negotiate a higher inbound rate when going into an area of low rates. This will cover the necessary revenue to get your truck out to a better-paying freight area. This way, any load you take out of the area adds to your bottom line; if absolutely necessary, having to deadhead out doesn’t put you in the hole.

Trucking will continue to have its ups and downs, mirrored by your small operation. The best way to succeed is to know your costs and the profit margin you need to sustain and grow, to make sure your rates reflect both the distance required and time necessary to complete each load.

Remember, revenue consistency within your rate range is the easiest road to success. Chasing rainbows will only get you wet.

 

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