Calculating and Reducing Variable Costs in Your Trucking Business
At K & J Trucking one of our primary passions is to help owner operators succeed in the business. There are several foundational concepts that help trucking business owners build a path to success, and one of these is understanding the concept of variable costs.
To further explain this concept, why it is important, and what you can do to help your business succeed, we turned to a local expert. Eric Maas is a CPA and managing partner at Lamfers & Maas, LLP. He has been in public accounting for over 15 years. One of the main industries he serves is trucking. In the article below he explains exactly what qualifies as a variable cost, how to stay on top of your expenses, and if tracking these costs really matters.
Definition of Variable Costs
I think it is important to start with a definition of some of the accounting terms we will be using. Variable costs are those costs which often fluctuate based on production or revenue generating activities; the number of loads, or miles driven. The higher volume of business you have, the higher your variable costs will be.
Common Variable Costs
- Mobile phone (if you have variable data plans)
- Loading and unloading fees
- Factoring fees (if you use a factoring company or have line of credit with bank)
- Taxes (road, fuel, property, payroll)
- Professional services
- Uncollected receivables (bad debt - companies who don't pay you, etc.)
- Collection fees
- Miscellaneous expenses
Definition of Fixed Costs
The opposite of variable costs is fixed costs. Fixed costs are predicable business costs that you will need to cover no matter what. These costs are going to be the same regardless of how much volume you are doing.
Common Fixed Costs
- Truck Payment
- Trailer Payment
- Insurance (all types)
- Parking Expenses
- Satellite Radio
- Mobile Phone (if you have an unlimited plan)
Definition of Contribution Margin
Your revenue less (or minus) your variable costs is often referred to as the contribution margin. This is the amount you have left to cover your fixed costs. The greater the contribution margin, the more you will have left over in profit after fixed costs are paid.
Your business will need to generate enough revenue to cover the variable costs and have a high enough contribution margin to cover the fixed costs with a remainder. That remainder is your profit.
Another option is to focus first on your fixed costs, add in your variable costs, and letting that determine how many miles, or how much revenue, you need in order to meet all costs and take home a profit. At this point, if you notice that you are not able to bring in enough revenue to cover all your fixed and variable costs, you can look into reducing the variable costs that are in your control (fuel mileage, truck repairs, meals, etc.).
Every trucking company, whether a single owner operator or large company should have a handle on their variable costs. Keeping a good set of books is key to tracking these costs. Your books should be organized in a way that breaks down your expenses into variable and fixed costs. Using an accounting software, or even simple spreadsheet, that is set up this way will allow you to run financials that show what your margins are and which variable expenses are affecting your profit margins the most.
The benefit of knowing this information is that you can analyze your costs month over month and look for opportunities to reduce your highest variable costs. Knowing your numbers also helps you determine how to set your prices so that your revenue is where it needs to be to generate the profit you desire.
Bottom line, if you don’t know what your costs are relative to your activities, you don’t know what revenue you need to earn in order to cover those costs and make a profit.
3 Quick Tips to Reduce Variable Trucking Business Costs
In many cases you can reduce variable costs with planning and preventative action. Here are some quick tips.
1. Reduce Your Speed
Reducing your speed is a simple adjustment (though not always easy) that increases your fuel mileage, decreases your fuel costs, decreases your road taxes, increases maintenance intervals, and increases your tire life. This is one very small change that can make a huge difference in your profitability, so do not overlook it.
2. Make Time for Monthly Tracking
Tracking your expenses regularly allows you to make small adjustments throughout the year rather than being blindsided during tax season. Keep track of your variable costs on an accounting program or spreadsheet and review them on a monthly basis. If you see troubling trends, don't be afraid to make difficult adjustments such as eating out less often, limiting phone data usage, or cutting unnecessary streaming services.
Also remember that your variable costs will and should vary throughout the year. Your goal is to keep them within an acceptable range, not try to control the uncontrollable. In certain seasons you will likely have increased variable costs. The key is being able to point to the reason for the increase and ensure it isn't causing you to lose profitability.
3. Find a Business Mentor
Getting into the trucking business doesn't have to be miserable! Find the right people to support you and answer your questions. If you start tracking expenses and don't understand what you are seeing, a mentor is a valuable resource.
If you are an owner operator looking for a robust network, consider leasing on to K & J Trucking. Have dreams of one day owning your own trucking business? We would love to talk to you about our lease to own program or company driver positions. Click the image below to start the conversation.