Cost Per Mile

Whether you run a taco stand or an automobile manufacturing plant, costs are what stand between you and the elusive P-word. Revenue minus cost equals profit.

So how can you calculate how much your business is making if you do not know your costs? This makes cost-per-mile (CPM) the most fundamental number in your business. It's a number you need to know.

So how do you calculate cost per mile? The idea is to add up every penny you spend on the business over time, and roll that number into the number of miles or hours you work. At its simplest, you take the cost incurred over time and divide it by the miles (or hours) you run.

Let's use the truck payment as an example. It's $2800 per month. You ran 10,000 miles one month, so $2800 divided by 10,000 miles equals 28 cents per mile. If your mileage is 12,000, your CPM would be 23 cents. At 8000 miles, the CPM is 35 cents.

That's but one element of the cost package. When you've tallied all your other costs, do the same arithmetic.

Most folks will find it easier to deal with this on a monthly basis, as most costs are dealt with monthly. You could do it annually, but you'd be dealing with larger numbers, and the fluctuations would be harder to spot. If you use annual or weekly billing for some things, be sure to convert those numbers to a monthly equivalent.

Why worry about cost per mile? How else would you know how much a trip will cost you, and thus, how much to bill the customer? Or whether the rate you're paid is sufficient? If you determine your CPM is, say, $1.50, and you're earning $1.60, you're running at a 10-cent-per mile profit. If your rate is $1.40, you're running at a 10-cent loss. If you're bidding on a 1000-mile trip, your rate has to be at least $1500.

If you're bidding on a three-leg trip, with a deadhead between two loaded legs, your rate for the two loaded legs must at least cover the cost of the entire trip. Empty miles really aren't any cheaper to run than loaded miles. You'll save a little on fuel, but not enough to make the radar screen.

Keep in mind here that if your costs are reasonable, that doesn't mean you should leave money on the table when bidding for work. Rates are market driven.

Always charge as much as the market will bear; don't give it away because your costs are low. Keep the difference; it's called profit.

CPM isn't the same as an annual profit and loss (P&L) calculation, but the results of your CPM calculations will tell the same thing your P&L sheet will.

Knowing where you stand on a monthly basis, you'll be in a better position to make adjustments (lowering costs or increasing revenue) before it's too late.

Business Input Costs
Your cost-per-mile calculation includes all costs incurred in the course of doing business. In short, anything you spend should be included in your figures -- from fuel to paper towels and parking fines. Here are some of the basics. Your costs will probably include all of these, and maybe more:

Truck payment -- this one's obvious. It's the amount of the cheque you write to the finance company every month for the privilege of calling yourself an owner-operator.

Fuel costs -- again, obvious, but not always straightforward. You may buy litres and U.S. gallons, and you'll pay for it in Canadian and U.S. dollars. Tally the totals, convert to Canadian (if that's how you do business), and use that figure as your fuel cost. Don't forget to strip the GST/HST from the figure; you get that back. Don't include the interest or carrying charges on your credit card for unpaid balances. They go in a different column, but they are operating costs. If you pay your own IFTA fuel tax, average the payout over the three months in the quarter, and include that in the gross fuel costs for each month. Don't forget to deduct any fuel surcharge you're paid from the fuel cost. Fuel surcharges are revenue.

Wages -- this one should be a no-brainer, but often it's not. Rather than take a wage (either a fixed salary of a mileage rate), many owner-ops live off of what's left of the month's proceeds. The cost of running a truck should include a wage for the driver (you), as it would if you were paying another driver. If you're incorporated and earn a wage from your company, don't forget to include the employer's portion of the usual withholding taxes such as WCB, EI, etc.

Truck insurance -- insurance costs will vary greatly depending on where in the country you're buying it, and/or what your carrier contract dictates. Independent operators will require a full package including liability, cargo, theft, fire, physical damage, etc. Leased operators are generally covered by the carrier's insurance, though exceptions exist, and then there's the deductible buydown insurance some carriers require. Costs vary with the level of coverage, operating area (U.S., Canada only, intraprovincial, etc.). In provinces with public insurance, the cost is often included with the registration fees.

Business, personal, credit, and travel insurance -- these are technically optional, though you'd be foolish to go without. Travel and medical insurance is a must if you operate in the U.S. Loss of income and disability insurance are equally important, as are business and credit insurance. All will help protect your investment in case you can't make a payment for some reason. And of course, these policies cost money. They're business expenses, so they're part of your cost-per-mile portfolio.

Plates, permits, and fees -- the Multi-Jurisdictional Vehicle Tax (MJVT) makes this cost component a little more difficult to calculate, but it's a number to include, as are any permits or fees you have to pay in the course of your work. These could include tolls, parking, lumping fees, etc.

Maintenance and repairs -- this one is a story in itself. How does a single-truck owner-op predict maintenance and repair costs without the benefit of a large fleet's worth of experience and data accumulation? Since predicting breakdowns is nearly impossible, we can use only regular maintenance costs, and add a margin for repairs. These are costs, even if the money isn't spent ultimately on repairs or breakdowns. The best we can do here is estimate, so common wisdom suggests 10 cents a mile. That may seem high, but it's a figure used for costing purposes, not necessarily an actual expense -- though it may be.

Professional fees -- your accountants, bookkeepers, lawyers, etc. don't work for nothing, so those costs are included too. Also include paralegals for fighting tickets, fees for training seminars, dues for association membership, etc. Here you could also include banking service charges and fees, as well as any administrative fees or charges levied by your carrier.

Communications -- you have to stay in touch with the world around you, so there will be communications costs. These include cellular phone bills and data packages, Internet charges at home and on the road, as well as long distance charges and business phone costs at the home office.

Misc. costs -- you can drill down as deep as you want here, but the bottom line is, if it's a cost incurred in the course of doing business, it should be included in the cost-per-mile calculations. Cleaning products certainly apply, as would fines and business supplies like pens, note pads, logbooks, and a GPS device and routing software package. Meal costs could also be included here, if you're incorporated and draw a per-diem meal expense from the company, or if you claim meal costs with receipts on a sole-proprietor basis. If you're still using the TL2 method, that would not qualify as a business cost. It's a personal expense.

The Bottom Line
Once you've tallied your costs, you'll have a baseline to measure future changes against. Such as, how much more it would cost to operate if fuel were to go up by a dime a litre. Or, how much you could save by improving your fuel economy by a mile per gallon. Don't kid yourself, a mile per gallon (US) is a huge improvement and it will save you about seven cents a mile at current prices.

Buying a new truck? You can calculate your new payment to see if the truck is affordable. Thinking of hiring on with Carrier XYZ? Now you can tell in advance if they pay enough. Thinking of putting a driver on your truck? Now you can see what he or she will cost.

Cost per mile is a number you can't afford not to know these days. If you find your costs are higher than you expected, don't arbitrarily adjust them downward. You'll have to find a way to actually lower the cost. Trucking is an incredibly cost-sensitive industry, and there's little room -- or sympathy -- for inefficient operators. But that's not to say that rates don't have to come up to meet reasonable cost structures.

Calculating cost per mile is the first step -- the easy part. Doing something about it is the next step, and one that will prove considerably more challenging.

If you'd like to know even more about this critical subject, plan to attend our very own Truck World 2010 show at the International Centre near the Toronto airport, on April 15-17. We're working with OBAC, the Owner-Operator Business Association of Canada, to have Jim present his cost-per-mile seminar at the show on Saturday morning, April 17. Last time it was standing room only, so get there early. For more info call 416-614-5812 or 1-877-682-7469 toll-free or visit www.truckworld.ca.

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