The trucking industry is the beating heart of American growth. Without trucks moving loads across the nation and around the clock, our economy, and our way of life would quickly collapse. But, is a trucking business profitable? In short, yes. On the surface, running a trucking company may appear to be a simple matter of making sure loads get from point A to point B. However, to run a trucking business profitably, it takes just as much effort, planning, and research as with any other business.
What is Profitability?
Before getting into the nuts and bolts details of a profitable trucking business it’s important to have a firm grasp on what it means to be profitable.
Profitability can be defined as: The degree of profit or utility generated by an action or investment.
Beyond the simple definition lies a deeper concept. Profitability is the cornerstone of successful business operations. It is where the amount of income generated by the company’s activities exceed the total of costs and expenditures generated by the company.
It is the difference between staying in business and going out of business.
Key Elements of a Profitable Trucking Business
The essential elements for a profitable trucking business are similar to most other industries. Think of the following list as the profitability skeleton of business. These are the bones that hold everything together and utilizing these elements will go a long way toward avoiding the dreaded sea of red ink.
1. Know the difference between costs and expenses:
The cost is the investment made in the product, while the expense is the disbursement in activities related to the operation of the activity necessary for production. In trucking, the lines can get a little blurred between costs and expenses. Basically, your product is your capability to legally and safely transport cargo in a timely manner. Therefore, your costs will be related to your equipment (trucks and trailers) and driver compensation (since they are a part of your capability to deliver the service you offer). On the other hand, expenses will include items such as fuel and maintenance, to name a few.
2. Build a strong cost structure
A successful trucking company is one that has a positive bottom line and solid margins for investing in the long-term success of the business, not one that has a million customers. Volume is not the issue; rather, intelligent pricing strategies and data-driven judgments are.
3. Define a cost policy based on the objectives and priorities of your company.
A company without a costs policy can be harmed by any internal or external threat, and will not be able to transform its weaknesses in strengths.
4. A financial team with training and experience in the trucking industry.
Your staff needs to be certified and professional. Hire people that have experience in this industry, not only for what their resume says, but mostly for what you can learn when you talk to them.
If your trucking business is just starting out, now is a good time to generate these records. Without these records you’ll never know where you stand, so stay on top of them.
5. Have extensive knowledge of your company
This should include your average costs in terms of equipment and driver staffing, as well as understanding your average quarterly expenses.
6. A record of your company's sales and expenses.
If your business is just starting out, now is a good time to generate these records. Without these records you’ll never know where you stand, so stay on top of them.
7. Know your break-even point
The breakeven point is the minimum amount of return necessary to have no losses and where the benefit is zero. Once you move to the positive, you transition to profit territory and the health of your business will steadily improve as long as you remain vigilant in regard to your income and expenditures.
8. Calculate and project your income statement
The income statement allows you to analyze the results obtained by your trucking business. It’s a useful tool that you can use to compare the results obtained in different periods (by comparing two income statements from different periods). For example, month to month comparisons, and once you’ve been around long enough, comparing a month this year with last year, quarterly, and yearly comparisons.
These comparisons are an invaluable aid in determining the success of not only how well you’re operating your business, but can also be used to determine the successfulness of certain services, advertising campaigns, as well as policies and procedures that may be helping or harming your company’s health.
9. Set an annual budget and break it down per quarter
Financial planning is essential in any company. This goes way more beyond than only working on financial projections. You need to break your annual budget into quarters and set financial goals in terms of costs, expenses, and sales.
10. Set your goals, strategies and actions
These goals should include something like determining if and by how much you can expand your fleet, or deciding whether or not to replace aging equipment to offset maintenance and fuel expenses.
11. Estimate your expenses and income
The benefits of doing this is that you will always know exactly how well your business is performing at any moment.
12. Review your budget plan periodically to make adjustments as needed
A budget review may reveal the need to curtail certain practices or policies your business engages in, as well as determine if the expenses associated with servicing certain customers is profitable or not. A budget review will also reveal where and by how much you can comfortably expand and grow your business without overextending and putting your company in jeopardy.
To boil it down, to be profitable you need to develop a knowledge of your industry, your company, and at a minimum basic accounting procedures. To get the most out of your trucking business, an accounting team with experience in the industry will be an invaluable asset. And, by following this list, and tracking your income and expenditures, you can plan for the future growth of your company. And this knowledge is key for seizing opportunities for profit and adjusting for or avoiding costs that may turn into a catastrophic drain on your company’s finances.
Trucking Company Profit Margin
The work of establishing whether or not your trucking business is profitable is merely the beginning. The next step, one that is equally important to determining your profitability, is to answer the question, profitable by how much?
The answer to that question is called the profit margin. To determine your trucking business profit margin you must first revisit the question of profitability.
The simple way to calculate the profitability of your investment into your trucking business is done by taking the profit and dividing it by the investment. Finally, the result is multiplied by 100 to determine the percentage of profitability.
The profit margin is the percentage that we add to the total cost of the product (load fees and accessorial service charges), which defines the price for which it will be marketed to the customer. An accurate calculation of profit margin is important to the success of your company or business.
A firm knowledge of the final price of your products and services is a well established and fundamental procedure in the business world.
Primary metrics to keep in mind:
- Sale price
Margin in Detail
If you sell a product for $80.00 and the materials used in its production cost $45.00, your gross profit is $35.00. But, how do you calculate the profit margin?
Let’s take a look at this example:
$35.00 / $80.00 x 100 = 43.75%
In this case, the gross profit margin is 43.75%.
Net margin is the cash left after paying all the fixed costs of the business. It is the result of subtracting all business income from total expenses.
In this case, we include taxes, charges, electricity, internet, water and other services in the value.
In the example above, if these values added up to $15.00, the net profit from the previous trade would be $20.00 ($35.00 - $15.00)
Following the example above, we have:
$20.00 / $80 x 100 = 25%
In this case, the gross profit margin is 25%.
That’s a lot of math to keep up with! Especially when you’re starting a trucking company from scratch. To get the most out of launching your company, and to ensure your profitability, it always helps to have someone in your corner with the knowledge and resources to grow your business.
Consulting and working with an established leader in the trucking industry is an ideal step in building your trucking business profitability for the long run. You can find that kind of support here at CloudTrucks with our programs designed to help you maximize profitability, such as Flex, CT Cash, and our most recent addition, Business Intelligence.