Owner Operators – First Steps to Success
Posted on Jan 26, 2010 - 1:26pm by James Dawson in Trucking
One of the questions I am frequently asked is, “How can I be a successful owner operator?” The simple answer is to run your truck like a business. The more difficult question is, “How do I run a successful business?”
The first thing I encourage an owner operator to do is to set up a separate checking account for your trucking business. Do not mix your personal money with your business money. This is the first simple step to success as an owner operator.
Next, you should hire an accountant. There are a few owner operators who have the experience to do their own accounting, but for most it is better to hire someone. Look for someone with experience with transportation who can also do your taxes for you. You will never be successful if you are not aware of what your income, expenses, taxes, and profit/loss are.
Pay yourself a salary. DO NOT just take what is left in the checking account each week and deposit it into your personal account. I would suggest that you pay yourself on a per mile basis, keeping your expenses on a mileage basis makes it easier for you to determine what it takes per mile to be profitable. Use all miles in your calculations, not just loaded. You truck expenses are based on every mile you travel. I would suggest you pay yourself about $.30 per mile on all miles.
You should identify all your major expenses: fuel, truck payments, and maintenance. Fuel can be easily calculated, just take the current price per gallon and divide by your miles per gallon (MPG). If fuel is currently $3.00 per gallon and your MPG is 6, then your fuel cost is ($3.00/6) $.50 per mile. As fuel prices change or your MPG changes you will need to recalculate this so you always have an accurate fuel cost per mile.
Maintenance depends on a variety of factors including the age of your truck. I would suggest you use between $.05 and $.15 per mile to estimate your maintenance costs. If you have been in the business for a while and have actually yearly maintenance costs then you can determine your own. Just remember to always allow more than your actual cost. You have to have to build a reserve in the good years to pay for the bad years when you loose an engine, transmission or turbo. Put left over maintenance money into a separate account or if your company has a repair and maintenance escrow that is a good option.
Your last major expense will probably be your truck payment. I would suggest using the payment itself to determine your cost per mile. Your accountant will tell you that the entire payment is not actually an expense since some of it is interest and some of it pays down your bank note. However, the payment is an actual outgoing cash expenditure therefore I would use it to calculate your cost per mile. This way you do not have to have a separate depreciation calculation which is not an actual cash outgo anyway. If your monthly truck payment is $1,200.00 and you average 11,000 total miles then your per mile expense is ($1,200.00/11,000) $.11 per mile.
With just these major expenses, let’s see what you are spending per mile:
- Fuel: $.50
- Salary: $.30
- Maintenance: $.10
- Truck Payment: $.11
- Total/Mile Expense: $1.01
Keep in mind that this does not include smaller expenses such as tags, taxes, parking, meals, telephone, etc… So you will need to make some allowances for those. Based on the numbers above and your smaller expenses, I would estimate you would need to average about $1.11 to the truck (including fuel surcharge) on ALL miles to break even. Usually you can cover your minor expenses by adding about 10% depending on how many miles your run per month.
Each month you would need to adjust the numbers based on your experience and expenses. You will find that if you can increase your MPG and find the cheapest fuel possible, you can make a HUGE difference in your overall expenses.
James D. Dawson
Vice President
The Mason & Dixon Lines
www.madl.com
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I would suggest that if someone were to consider becoming an owner operator they should begin by answering two fundamental questions:
1) What does it mean when a business is described as a “Commodity-type business” and how should that affect my decision to enter that business for myself?
Here’s a simple beginner’s explanation from about.com:
If you were in charge of shipping for a factory or warehouse, would you be willing to pay more for Company A’s shipping service than Company B’s shipping service if the end result was the same – getting the product from point A to point B in X amount of time? No. You base your decision on price. Trucking is a commodity business and you should truly understand the implications of competing in this type of business before getting into it or you will quickly find out the hard way.
2. If owning a truck and hauling freight is so profitable, then why are so many companies choosing not to own their own trucks but are encouraging me to do so instead?
This should throw a major red flag. The real money in trucking is not in owning trucks and hauling freight, it’s in providing services to those who own the trucks – brokerage services, repair and parts services, logistics services, reselling insurance, and reselling bulk discount services.
I do not know Mr Dawson and I offer my opinions with all due respect to him. Since we’re educating people on the prospects of becoming an owner operator we should give them both sides of the story so they can make an informed and educated opinion. I’m not saying you should avoid becoming an owner operator. I’m just saying you should do mountains of research before diving in – it’s a tough world to survive in.
Trucking is a service and not a commodity…end result, some provide better service than others, some companies are willing to pay for that service as the carrier is an extension of the shipper regardless of who’s name is on the door or trailer.
One item not mentioned is aligning yourself with a company that treats the owner operator as a partner and not a company driver with his own truck. Read the contract, be sure you are comfortable with the compensation, interview current drivers to get their take. Look at turnover and longevity of driver fleet. All good indicators of whether the company leasing trucks is truly beneficial to the independant contractor model.
Mr. Dawson’s expenses are pretty much accurate. In regards to item #2…Trucking model is evolving and carriers are benefiting from reduced overhead by paying the driver to be his own business. In regards to brokers. No love for them at all.
Great coverage and way of looking at it. Its all business. And with the rates now adays, you’ve really got to pay attention
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Great little article, Im Simon and I am just starting out – what a year to start hey ! 14 years working for the big boys now time to give it a shot. Nice little artice I really enjoyed the read. Keep up the good work.
Wouldn’t insurance on the truck and cargo(with your own authority) be more significant than just to show up in miscellaneous?
Are you same Mason Dixon Line that I heard about undercutting rates so low….that truckers who own authority and equipment cannot compete with the rates….then giving business advise….
Do you own a brokerage? If this is not the Mason Dixon Line the truckers have heard about….then I do apologize…..
Trucking needs to be regulated on the brokerage side, this way everyone can Capitalize including the guy who owns the equipment…instead of brokerages and big bankers…controlling the market…and rates…..which by the way is breaking the laws of the land…in a capitialistic world…..Rate fixing to the trucks…..
Lesa, thanks for you comment.
The Mason & Dixon lines is a 100% owner operator and agent based company. As an owner operator company it is very important for us to keep our rates as high as possible because we pay our operators a percentage of the load. If our operators are not profitable we do not stay in business. It is also advantageous for our agents to maintain a high rate structure since they are paid a percentage of the load. In fact, the Mason & Dixon lines as part of Universal Truckload Services was previously recognized in Transport Topics as having one of the highest rates per mile for a truck load carrier.
I think you will find that large company fleets are more likely to compete based on rates. Large company fleets will sometimes lower rates to get a larger volume of the freight. Brokerage only companies will also do this because of their low overhead expenses. In fact, we recently completed a bid with over 3400 lanes for a major U.S. shipper. The Mason & Dixon lines was awarded 7 lanes out of a possible 3400. The other lanes went to a variety of companies many of which were large company fleets, brokerages, and logistics companies.
The Mason & Dixon lines does operate a successful brokerage department. We require that our agents maintain our rate structure whether they are loading a broker truck or one of our owner operators. The advantage to us operating a brokerage department is that it allows us to introduce more freight into our network that our operators can choose from and it better helps us to meet our customers shipping needs.