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So You Wanna be an Owner Operator?, Pt.II

by Jim Park

Part 1 Of This Story

Most small businesses fail not because they don't earn enough money, but because they don't have a good handle on the cost of running the business. And there's no shortage of costs: fuel, maintenance, permits, repairs, wages, phone bills... the list goes on and on. But for the first-timer, there's a single cost that can't be ignored; one that must be considered before all others. The cost of the truck.

According to veteran owner-operator, Herbie Walker, many owner-ops get them selves into trouble by buying the truck they want, then not being able to find a job that will support the thing. A truck is a tool, first and foremost. Unfortunately, the truck is also why many drivers dream of becoming owner-ops in the first place. And the most common mistake made by prospective owner-ops, as Walker indicated, is loosing sight of the true reason for buying a truck.

Buying a truck is buying a business. Period. It's not a hobby or a pastime; it's a for-profit venture -or at least it should be-a venture that requires a great deal of planning and budgeting to be even modestly successful. If the only reason you're dreaming of becoming an owner-ops is to drive a bigger, shinier truck, then I respectfully suggest you re-examine your objectives. You can plan your way into that big shiny truck, but it may take you five or ten years to do it properly.

The problem today is, it's just too easy to get yourself into a big truck with almost nothing down. Getting into the truck is the easy part. Getting through the first few years and establishing some equity in your business is a lot more difficult.

The Buying Strategy

Assuming that you've done your share of homework, and you've made a few mistakes driving a company truck, you're now ready to start planning your big career move. Depending on whom you've consulted, you've probably been told to buy new right from the start. Or, you may have been advised to buy used first. There's no end to the confusion, is there. For what it's worth, I recommend that you start with a used truck -and I'm not alone. The purchase price is the major consideration here --and it's a consideration that shouldn't be ignored. If you were to buy a new truck, you'd be looking at a minimum of $120,000, plus tax and the cost of the financing. You'd be looking at payments of $2700 for at least five years. And that doesn't include the tax liabilities incurred when the depreciation deductions run out half way through the third year. There's a lot more to the 'cost' of a new truck than meets the eye.

John Q. Broker

Here's a snap shot of a "typical" owner operator and how his cost per mile breaks out, using our formulas and examples. Your own results may be considerably different.

Truck Payment- 25.4 CPM
Fuel Cost- 39.0 CPM
Insurance coverage- 4.7
Cost of life on the road- 11.3
Plates, Permits and Administration- 3.2
Maintenance- 13.6 avg. over four years
Total cost to run a Class 8 tractor in 2000: 97.2 cents per mile.

What's interesting here, is that we haven't included a wage for the driver, but we did include his on-road expenses. If the owner operator's family budget requires a $30,000 input, then he's going to fall short somewhere on the rest of his business inputs.

It could be that our maintenance costs, at 13.6 cents, are high, but when you consider the source of the numbers, you'll see that they can be quantified. Perhaps our sample owner operator is over-insured, but guarding against possible catastrophic loss is a sensible thing to do. Not doing so places a heavy risk on your operation.

Maybe he's just living too high while out on the road. Well, given the chance, would you rather sit down and enjoy two reasonable meals a day in a restaurant, or live out of a cooler? Our numbers aren't unreasonably high under reasonable circumstances.

So, there's a pretty accurate template to work from in determining what it might cost you to run a truck of your own. The two biggest variables are the monthly payment and the cost of fuel. Both are yours to control, and your driving habits and buying preferences will determine what you can afford.

I'm not trying to talk anybody out of following their dreams, I'm simply pointing out the potential pitfalls so as to help prospective owner-ops avoid some of the problems other less vigilant business people currently find themselves in.

In next month's installment, we'll look at some typical owner-op agreements and try to put some real world perspective to them. This will help you see the difference between the promises and the potential.

Many accountants familiar with the peculiarities of truck ownership will tell you that 36 months is the ideal payment schedule. It's next to impossible to meet that criteria while carrying the full cost of a new truck. A solid, reliable used truck can be acquired for less than half the price of a new truck, especially in today's used truck market. There's a glut of used trucks on the market right now, and it's indeed a buyers market. Especially if you're shopping for a fleet trade-in.

Here's where we separate the men from the boys when it comes to the truck purchase. Remember that if it's a big shinny large-car you're after, you're going to pay for it. If you're prepared to settle for a modest fleet-spec truck, then you can practically write your own bill of sale. But who the heck wants a fleet truck? The answer, and I offer no apologies here, is anybody who wants to make money first and look good second.

It will take you 30 months to pay for that three-year-old used truck at roughly $2200 per month. And at the end of three years, it'll be worth about the same as the five-year-old new truck that the other guy bought. You bought yours for $50,000 and can sell it for $25,000, whereas the other guy bought his for $125,000 and might be able to sell it for $35,000. All he did was run it for two years longer, lost his depreciation deduction and burned up all of his equity.

At the end of three years, you're now two years ahead of the other guy in implementing the second phase of your buying strategy. If you've got $25,000 in trade-in value for the first truck, you can now afford to buy a truck worth $75,000 and still only carry $50,000 worth of principal and financing charges. You can also afford to increase the payments a little because the newer truck, technically, should be a little more reliable than the $50,000 truck. But, stick to a modest, fleet-spec truck again because there's more value there than with the popular classic-styled trucks that everybody else wants. Supply and demand.

At the end of the next three years, your second truck, now five years old, is worth about $40,000. Take your trade-in value and buy yourself another two-year-old fleet truck, but shorten the term to 24 months from 36. At the end of two years, your four year-old truck will be worth forty or fifty thousand dollars. That's how you build equity.

You should be able to see a pattern developing here. You use the equity, or residual value, in your previous truck to enhance your buying power on each subsequent and slightly newer truck. Try to increase the downpayment and shorten the financing term each time you trade, and eventually you'll be able to buy new with half or perhaps two-thirds of the price taken care of with the down payment. I've spoken to drivers who've taken a decade or longer to get into their first new truck --and they aren't the guys you hear complaining about being one paycheque shy of going broke.

They've planned their way into the big shiny truck they've always wanted, and frankly, they deserve it by the time they finally get it.

The Pros and Cons of Used Trucks

Reliability and cost of operation are big concerns with used trucks. It's hard to budget for maintenance and repairs on a used truck if you have no idea how the previous owner treated the truck. This is another reason to consider an ex-fleet truck. Chances are the fleet will have maintained the truck properly, and they will certainly have maintenance records for the truck. Ask for the records before you buy, but if they're unavailable, you might want to consider another unit.

Look for transferable warranties too, and consider buying all the extended warranty you can get your hands on. It's cheap insurance.

Another reason for buying the fleet spec is efficiency. Fleets buy trucks not because they look good, but because they expect the truck to earn money. Modest power trains, aerodynamic styling and long-life components are the hallmarks of a fleet truck. If the truck made the fleet money, it should make you money too. All owner-ops would profit from taking a closer look at the fleet's spec-sheet. Some fleets spend hundreds of thousands of dollars researching a single component before they include it on their order form. If it works for them, it'll work for you too.

You may now be saying to yourself, 'what the heck is the point of buying a scaled-down fleet truck, that's what I'm driving now.' Well, one of your most valuable research tools may be sitting directly beneath you.

If you're already driving a fleet-spec powertrain, then you should be monitoring the performance and maintenance costs of the truck as closely as you would if it were your own. Because it might well be your own someday. How's the fuel mileage? How is it on tires? Are the brakes dependable? What about the cooling system? Monitoring these costs now will give you an excellent idea of what to expect in terms of operating costs after you've painted your name on the door. Track the costs for as long a period as you can, then consider what the costs would be if you added a monthly payment to the equation. Remember that you can get the same powertrain under almost any hood. Whether you choose the same brand of truck or a different model, your costs will be similar.

So, How Much Does it All Cost?

In the April issue of highwaySTAR magazine, we ran a feature story called Know Thy Costs. It was intended as an exercise in learning how to peg your Cost Per Mile, or the cost of running the truck, on a per mile basis. Here are some excerpts from that story to help you understand the cost of running a truck.

With margins as slim as they are for today's owner operator, the cost of doing business must be clearly understood. Being off in your calculations by as little as a penny a mile means you're missing about $1000 in annual costs, or revenue.

The purpose of this exercise is to help you determine your own personal cost per mile (CPM) numbers. Every owner operator will be different -some slightly, some extremely. We'll show you the formula, and then you can plug your own numbers into the equation to get a realistic picture of the per-mile cost of running your own truck.

Soft Costs

Soft costs include expenses like meals on the road, entertainment, clothing etc. These costs add up quickly, and because they're often taken directly from your pocket, they're very difficult to track. For purposes of this exercise, we've estimated the cost as it might be under ideal circumstances. After all, most would acknowledge that eating from a cooler is not so much a matter of taste as it is economy.

Breakfast- $6.00
Dinner - $10.00
Coffee and tobacco- $8.00
Entertainment; such as magazines, movies, Park 'N View, video games, pocket books, etc.- $5.00
Total: $29 per day.

We estimated these daily costs based on 300 days away from home, and we've included $100 per month for the phone bill. The total is a whopping $10,000 annually, provided you never leave the country. A driver who spends about two-thirds of his time south of the border pays more. Canada only: $9,900. Canada/USA: $12,450.

Living Expenses by Cents per Mile

Living
Expenses
Annual mileage in 1000's
90 100 110 120 130 200 220 250
$10,000 12 10 9.0 8.3 7.7 5.0 4.5 2.5
$12,500 13.8 12.5 11.3 10.4 9.6 6.2 5.7 5.0

A driver running 110,000 miles a year in a typical U.S./Canada long-haul operation will incur a cost of 11.3 cents per mile. Track your own soft costs carefully on a daily or monthly basis, multiply them by the amount of time spent away, in days or months, then divide them by your annual mileage.

The Big Ones

Here are two charts you can refer to in order to pull out your numbers. They're constant and aren't impacted by as many variables as other costs.

Monthly Payment in Cents per Mile by Annual Mileage

This one may seem pretty obvious at the surface. It's the payment you make to the bank every month. For the purpose of this exercise, consider your monthly payment a matter of monthly, or per mile, cash flow.

  Annual mileage in 1000's

Payment

90

100

110

120

130

200

220

240

250

$1,200

16

14.4

13.1

12

11.1

7.2

6.5

6

5.8

$1,500

20

18

16.3

15

13.8

9

8.1

7.5

7.2

$1,800

24

21.6

19.6

18

16.6

10.8

9.8

9

8.6

$2,100

28

25.2

22.9

21

19.3

12.6

11.4

10.5

10.1

$2,400

32

28.8

26.2

24

22.1

14.4

13.1

12

11.5

$2,700

36

32.4

29.4

27

24.9

16.2

14.7

13.5

12.9

$3,000

40

36

32.7

30

27.7

18

16.4

15

14.4

$3,300

44

39.6

36

33

30.4

19.8

18

16.5

15.8

$3,600

48

43.2

39.2

36

33.2

21.6

19.6

18

17.3

A driver with a monthly payment of $2700, running 110,000 miles per year will incur a cost of 29.4 cents per mile. Take your own payment, then divide it by your annual mileage.

Fuel costs, by the Mile

If your monthly fuel bill happens to be $4250 for 10,000 miles, then your cost per mile is 42.5 cents (divide the dollar amount by the mileage, $4250 ÷10,000 miles = 42.5). Or, if you buy all your fuel at the same price, convert the price per litre to a price per gallon (.65 per litre X 4.546 = $ 2.95 per gallon). Then, divide the per gallon price by your fuel mileage ($2.95 ÷6 mpg = 49.1) Or, use our chart.

Fuel Cost per Mile by Miles per Gallon and Fuel Cost

  CPL

MPG

50

55

60

65

70

75

80

5.0

45.4

50.0

54.6

59.0

63.6

68.2

72.8

5.5

41.2

45.4

49.6

53.6

57.8

62.0

66.2

6.0

37.8

41.6

45.5

49.1

53.0

56.8

60.6

6.5

34.9

38.4

42.0

45.3

48.9

52.4

56.0

7.0

32.4

35.7

39.0

42.1

45.4

48.7

52.0

7.5

30.2

33.3

36.4

39.3

42.4

45.4

48.5

8.0

28.3

31.2

34.1

36.8

39.7

42.6

45.5

8.5

26.7

29.4

32.1

34.7

37.4

40.1

42.8

A driver averaging 7.0 miles per gallon, with fuel priced at 60 cents per litre, is spending 39.0 cents per mile on fuel.

Maintenance and Repair

Perhaps the most difficult expense to quantify, especially for a single-truck owner operator. He has little if any precedence upon which to predict his maintenance costs, or more importantly, his repair costs. Maintenance and repair budgets are the so-called "rainy-day" funds. Money you must set aside knowing that eventually you'll have to spend it, although you don't need to now. But how much is prudent? There's the $66,984 question. In fact, according to Myron Graham, director of operations at Rentway Ltd. that's precisely what the operator of a tractor, running tandem/tandem, turning about 100,000 miles per year should expect to pay in maintenance and repairs over a five-year period.

Large operations such as Rentway Ltd. have the advantage of being able to track component performance, longevity and life-cycle costs on not one, but thousands of vehicles. A lifecycle tracking mechanism as sophisticated as Rentway's is probably beyond the reach of most single or small fleet operators. So, Rentway has kindly provided some detailed information showing an estimated cost per mile that could be applicable to many small operators.

Graham has adjusted his cost estimates to reflect retail parts pricing and shop labor rates rather than the actual numbers he uses, to provide a more realistic picture for the owner operator.

Chart of Graham's figures

Part 3 Of This Story

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