Instead of just controlling costs, owner-operators should be focusing on “waste control.”  The things you need to run a trucking business, such as fuel and equipment, often get used inefficiently.  The resulting waste hits where it hurts the most—in the pocketbook.  Remember, every dollar saved goes directly into your pocket.

The following are typical areas where owner-operators can control their costs.

Truck Specs:  An aerodynamic truck yields greater load capacity, more comfort, less noise and higher profit than a “show truck”.  According to Cummins, Inc., an aerodynamic truck requires 22% less horsepower to maintain 65 mph.

Speed:  Experts agree that every mile per hour driven over 60 mph reduces fuel economy by one-tenth of a mile per gallon.  The impact of that one-tenth of a mile per gallon over a year’s worth of fuel and miles can be significant.

Fuel:  Of all the variable costs for an owner-operator, fuel is the biggest expense, but also the most controllable.  For good fuel economy, besides speed, which I mentioned above, the following are some things you can control to reduce wasted fuel: limit idle time, check tire pressure regularly and perform regular maintenance.

Road Expenses:  By equipping your truck with a refrigerator and microwave, you can eat healthier and save yourself up to $3,000 - $4,000 a year in food costs, while still benefiting from the per diem deduction the IRS allows you to write off. 

Communications:  Your cell phone is important, but be careful which “plan” you chose.  Certain plans, such as prepaid cell phones and phone cards, can wind up being very expensive.  A plan that allows for extended use on weekends and nights can be a huge money-saver.

Discretionary Spending:  Before every purchase, ask yourself if you are buying something you absolutely need or better yet, whether it will it help your business?  If not, keep the money in your pocket.  Even if the item is tax deductible, the tax savings are typically only 15% - 30% of the total purchase.  For a $500 purchase, you might save $75 - $150 in taxes but you may have also wasted $350 - $425 of your own money.

In the next blog we’ll go into more detail in understanding how you are taxed as an owner-operator.

Your P & L statement is a useful tool, giving you a snapshot of how you’re doing for a specific period of time.  However, you can increase the value of the statement as an analytical tool by comparing it to your budget, your past performance and other drivers at your carrier, or in the industry.

Your Budget

Your budget was created as a way to set expectations about what you hoped to accomplish in your business.  As you receive your monthly P & L statements, you should compare your actual numbers to your budget to see if you are meeting your goals and expectations. 

Is your revenue lower than you had hoped?  Is there a particular expense that is higher than it should be?  Once you identify a problem, area ask yourself why the number is what it is.  You can then focus on ways to adjust what you’re doing to correct the problem area.

Past Performance

Your profit and loss statements show you one month at a time and should also give you your year-to-date performance.  Valuable information can be gained by comparing your results month to month and eventually year to year.

By comparing your results month to month, you can better understand how certain actions affect your business results.  If revenue was high one month but not the next, analyze what you did differently or what circumstance caused the drop in revenue.  This will give you knowledge to adjust your actions going forward.  Are certain costs higher in one month than another?  By applying the same analysis you can determine what happened to cause the higher costs and find ways to keep those costs down.

Comparing year over year will help you see if your business is growing and becoming more profitable. It will also help you recognize and track trends such as freight cycles.  Understanding where those slow times are for your operation will assist you in making better business decisions about saving for slower months or when to take time off.

Industry Comparisons

Another area of useful comparisons is to analyze how you are doing in relation to other owner-operators.  This is called formal benchmarking and is the key to understanding the bigger picture, not just how you are doing within your own business.  You will need to work with someone who has data available on thousands of owner-operators and can provide benchmarking of your P & L statement for you on a line item basis.

Industry comparisons should be used as a guide to point out areas where you want to focus attention in your business.  They can also help you understand changes that are going on in the industry and what other drivers are doing to adapt.  If you are not doing as well as other drivers in the industry, this is your opportunity to solve the problem and make more money.  It is up to you.

Next time we’ll talk about ways to control costs.

The April 15^th deadline for filing taxes has just passed.  Many of you got your taxes submitted on time and some of you probably filed extensions giving you until October 15^th to file your return.  A lot of you had someone else prepare your tax returns for you.  Because we all hate paying taxes, there is often the temptation to use a preparer that promises higher refunds, sometimes suggesting deductions that may not be legitimate. Making the choice to use a dishonest tax preparer can put you and your business at risk.

-A federal jury in Cincinnati convicted Walter L. Daulton, a 62-year old self-described truck tax expert, on charges of assisting in the preparation of fraudulent income tax returns.  On many of his clients' returns, he reported numerous fictitious expenses that his clients had neither paid nor incurred.

-The Government Accountability Office (GAO) did a study of 19 chain commercial tax return preparation firms and found only two of the 19 tax return preparers had the correct tax liability and refund amounts on the returns they prepared.  All 19 tax return preparers made a mistake on the prepared returns.

-The Treasury Inspector General for Tax Administration (TIGTA) secretly shopped 28 un-enrolled tax preparers in large metropolitan areas.  Seventeen of the tax return preparers did not show the correct amount of tax owed or refund due on the returns they prepared.  No tax return preparer correctly calculated the expenses relating to self-employment income.

-It was discovered during confirmation hearings that the future Treasure Secretary and head of the IRS, Tim Geithner, failed to pay taxes on income in 2001, 2002, 2003 and 2004.  Mr. Geithner blamed the error on the tax software he used to prepare his return.

-A Pennsylvania tax preparer was sentenced to seven years in prison and ordered to pay $216,000 in restitution for filing false tax returns.  Numerous clients were audited and forced to pay interest, penalties, and additional tax. [The preparer] had kept a portion of their returns, sometimes receiving $2,500 for preparation.

- A Social Security Administration employee who moonlighted as a tax preparer for Jackson Hewitt was indicted Wednesday in Little Rock for preparing false returns, fraudulently using Social Security numbers and identity theft.

Each of the above items is an excerpt from a real news story, a few of the many stories that are reported across the country every day as the IRS steps up its efforts to ensure paid tax return preparers are assisting clients appropriately.  But, as the above articles point out, the responsibility does not rest solely with the tax preparer. 

If you use a dishonest or untrained preparer and submit false or fraudulent returns, you could be hit with additional taxes, interest, penalties and possibly even face criminal prosecution. 

The IRS estimates that 900,000 to 1.2 million people prepare tax returns for a fee. Yet these financial advisers have no requirements for certification, and many have never been tested.  Due to the thousands of cases of tax fraud and abuse like those mentioned above, the IRS has finally decided to take action. 

Beginning in 2011 for the 2010 filing season, the IRS will begin to regulate ALL untrained preparers that do not hold a professional designation.  Untrained preparers will be required to complete the following:

• Register with the IRS
• Pass a Competency Exam
• Complete Continuing Education on an ongoing basis
• Comply with IRS Ethical Standards

If fraud or error is detected, all returns prepared by that tax preparer can be subject to audit.  If this turns out to be your preparer, the best you can hope to experience is the hassle of an audit.  The worst could be interest, penalties and additional taxes owed because your return was prepared incorrectly.  And if you knowingly submitted a fraudulent return, then you could also face criminal prosecution.

The IRS offers these tips to keep in mind when picking your tax return preparer:

• Be wary of tax preparers who claim they can obtain larger refunds than others.
• Avoid tax preparers who base their fees on a percentage of the refund.
• Use a reputable tax professional who signs the tax return and provides you a copy.
• Be sure the individual or firm will be around after the return has been filed to answer questions
• Question any tax preparer that encourages you to take deductions that are not supported by documentation.
• Find out if the preparer is affiliated with a professional organization that holds them to a code of ethics.

Remember, you are legally responsible for what is on your tax return, even if those returns are prepared by someone else.  Don't wait until 2011 to find out if your tax preparer is acting in your best interests. 

How much money am I making? How are certain actions affecting my business? How much do I owe in taxes? What are my problem areas? Is my budget accurate?

The Profit and Loss Statement (P & L), also called the Income Statement or Earnings Statement, is one of the most valuable financial reports for viewing the status of your business. It measures your revenue and expenses during a specified period of time and shows your financial progress for that time period. The massive amount of numbers listed on the P & L statement can often be confusing and intimidating but understanding what they all mean can help you answer the important questions listed above.

The P & L Statement is creating by accumulating all of your settlement information and receipts for a time period and sorting the information into like categories such as fuel, maintenance, revenue, truck payments, etc. Each category is totaled and entered into its own line on your P & L Statement. In order for your statement to be useful, the information you see needs to be as complete and accurate as possible.

The Profit and Loss Statement employs a very basic formula.

Gross Revenue - Expenses = Net Income or Profit.

Going into more detail such as to the type of revenue and a breakout of individual expenses enables you to analyze your business and make adjustments going forward to increase your profitability.

Your Profit and Loss Statement should follow general reporting guidelines and should be designed with revenue and expense items unique to a trucking business. Things can change quickly in your world so receiving statements monthly is critical in making timely business decisions. The following are items that should appear on your monthly P & L Statement.

• Miles. A summary of loaded, empty and total miles driven.
  
• Income. Mileage or percentage of load pay and miscellaneous income, which includes your fuel surcharge pay, stop pay, detention pay or any other accessorial revenue.
  
• Expenses. Broken out between Fixed Costs and Variable Costs. Your P & L statement should also give you the CPM for each expense.
• Total Expenses. Fixed Costs and Variable Costs added together.
• Net Income before Tax. The amount left after total expenses are subtracted from your gross revenue. This is your profit and is also the amount that is used to calculate the taxes you owe.
• Cash Advances. These are listed separately as they are not part of the Net Income equation.

The P & L Statement is a useful tool that gives you a snapshot of how you're doing for a specified period of time. Next time I'll talk about how to increase it's usefulness as an analytical tool.

If someone asked you how much it cost to run your truck last month would you be able to tell them off the top of your head, or would you have to spend hours digging through receipts and adding them up? Even if you knew your total costs would you know how it compared to the previous month's total costs? How about year to year? Or what caused the increase or decline for each cost? Keeping track of your cost per mile allows you to understand this information.

Cost per Mile (CPM) is the cost of operating your truck for each mile driven.

Total Cost ÷ Total Miles = Cost Per Mile

Your total CPM is calculated by adding together all of your business fixed costs and business variable costs for a period of time, for example one month. Divide this total cost number by your total miles for the same time period to get your CPM which will be expressed as cents per mile.

Your cost per mile will change depending on the number of miles you drive. As you increase the miles you drive, your total cost per mile will decrease. Even though your variable costs such as fuel and maintenance will increase the more miles you drive, your fixed costs will not vary based on your miles. Instead you will spread your fixed costs out over more miles which ultimately lowers your total per mile cost.

In addition to calculating your total CPM, you can also calculate an individual cost per mile for each expense you have. Divide the individual expense by your total miles in the same period of time to calculate your individual CPM. You can also calculate your CPM for just your fixed costs or just your variable costs. This will allow you to compare your individual expenses month-to-month to determine how you are doing and where to focus your time and energy on managing your expenses.

Because many owner-operators get paid by the mile, knowing your cost per mile is invaluable for making an apples-to-apples comparison between costs and revenue. If you are paid on a percentage of gross revenue per load, you can determine what your pay is per mile and still make meaningful comparisons between your revenue and costs.

Knowing your pay on a per mile basis and knowing your CPM allows you to analyze your business and make projections as to your profit and cash flow. Using CPM to project numbers will help you understand the impact every day decisions will have on your business and ultimately, your profitability. It will also help you see what you need to do to meet your goals.

Next time we'll put both revenue and costs together and take a look at your financial scorecard

Managing costs is important regardless of the state of your business. If you are doing well, cutting costs will increase your ability to save more or invest more in your business growth. If your business is in financial danger, cutting costs is one of the key components in weathering problems and getting back on track.

But before you can start to manage your costs effectively, you must understand the difference between the two general types of costs: fixed and variable.

Fixed Costs

A fixed cost does not change from month to month but instead stays the same regardless of the miles you drive or your efficiency. Generally, they cannot be altered on a short-term basis because of contractual agreements. They are often referred to as a cost of time since they are due on a regular basis such as monthly, quarterly or yearly and are incurred daily regardless of business activity.

The way to determine your fixed costs is to consider the expenses you would have to pay even if you weren't driving your truck. For an owner-operator, these are typically costs such as the truck payment, insurances, base-plating or registration fee and the yearly heavy vehicle use tax. You still have to make these payments whether you drive every day or take a month off and the amounts don't change, at least in the short term.

One of the ways to manage your business successfully is to understand what your daily fixed costs are. If you know what it costs to own your truck each day, you can make sure that you generate enough revenue to offset those costs. Doing a quarterly or yearly review of your fixed costs to ensure they are as low as possible will help your net income. Understanding your daily fixed cost is also an important tool for understanding the amount of revenue you will need to be successful and also for managing your time off.

Variable Costs

Variable costs are those that change based on the distance traveled and are directly related to operating your truck. These costs are driven by the business activity and the miles you run. Think of variable costs as the costs of distance because they change based on the number of miles you drive. The variable costs you incur are what make your truck go down the road.

You won't know the total of your variable costs until you actually start driving although your budget will give you a good idea of what it will be. They include expenses such as fuel, fuel taxes, your per diem, communication, supplies for the truck and maintenance. These costs can be lowered overnight by changing your own habits. The most profitable owner-operators pay attention to their variable costs and minimize them wherever possible.

Next time we'll look at the importance of knowing your cost per mile.

Many drivers become owner-operators so they can make more decisions for themselves and have more control over their lives. If you don’t develop a good plan for managing cash it’s only a matter of time before a serious crisis takes away your ability to make decisions for yourself. Poor cash management may also mean that cash reserves aren’t available when you need the money most, and that could put you out of business.

The following are typical signals of poor cash management that could prevent your business from being successful:

• Over-advancing or taking cash advances to pay for meals, rent or other personal expenses. You are always working to get caught up.
• Not keeping truck money and personal money separate.  It is very easy to use “truck money” on personal needs, often overlooking the need to save for things like maintenance and taxes.
• Turning down a better-paying long trip for a short trip to get paperwork in prior to the pay period cutoff. The focus is on short-term cash, not the greater revenue that might have been generated from the longer trip.

Solutions

You don’t have to live settlement to settlement. In earlier blogs, I talked about developing a budget. A budget can help you understand exactly how much you’ll need to cover business and personal expenses.

Open two checking accounts, one for business use and one for personal use. Have your settlement check deposited in your business account and from your business account, pay yourself the amount you need to cover your personal expenses. Leave the rest of the money in your business account to cover savings and taxes. Don’t touch it, except in an emergency and don’t take cash advances for personal needs. Every time your business account reaches $5,000, put half of it into an interest bearing savings account that you can access without penalties.

How Much Should You Pay Yourself?

List all of your personal, non-driving, monthly expenses and divide that amount by 4.33 to determine the amount you’ll need each week. Use 4.33 to accommodate months that may have five weeks instead of four. Pay that amount each week into your personal checking account after your settlement has been deposited in your business account. You shouldn’t need to pay yourself any more unless an emergency arises.

Don’t take advances for personal reasons; open a business account for your settlement; pay yourself only the amount needed to cover personal expenses and leave the rest of the money in your business account. Don’t touch it except for retirement, investments, taxes and of course, surprises. Follow these simple steps and with proper money management habits, you can control your cash flow and have more money to show for your efforts.

I’ve spent time talking about setting up a business properly and the importance of planning. In my next blog we will look at Fixed vs Variable Costs.

Pay-per-mile is just one component of your gross revenue and is usually consistent from year to year. Gross revenue is the total amount of money paid to you by your carrier and can include mileage pay, percentage of revenue pay, unloading pay, stop in transit pay and fuel surcharge pay. Gross revenue is less consistent. Many variables can affect gross revenue such as the weather, the local or national economy, freight cycles, competition, regulations and average length of hauls.

While you may not have control over many of these factors, there are some ways you can help manage your gross revenue.

• Set Expectations. Determine a reasonable amount of miles you expect to run based on your experience, health, personal and family needs, the condition of your truck and financial goals.
• Measure Results. Review accurate profit and loss statements on a regular basis, so you know if your actual performance is meeting your goals and expectations.
• Manage Your Time. Understand how to best spend your time driving and delivering loads as well as planning your time off effectively to achieve maximum revenue.
• Customer Service. Be an effective communicator with both your carrier and customer and be on time with your pick-ups and deliveries. Practice good customer service skills to get the miles you need to be profitable.

In addition, don't fall into the trap of believing many of the misconceptions about revenue. They can cause you to lose your business focus and make less effective decisions for your business. The following are some of the more common myths about revenue.

• Concentrate only on increasing revenue. You cannot ignore costs because they won't take care of themselves. After your break-even point, only a fraction of every extra dollar of revenue goes in your pocket but 100% of every dollar of cost saved contributes to your profit.
• More revenue per mile is the answer to your problems. More important is gross revenue and net income, taking into account every component that
• Run hard and get a lot of miles. Revenue is only half of the equation. Costs have to be managed as carefully as revenue in order to be successful.
• Large settlement checks mean you are doing well. Your settlement check is only one part of the picture. Costs, miles driven, time off and mechanical problems all have to be considered to determine your level of success.
• Your carrier can control your pay per mile. Your carrier has limited control over the rates they charge shippers because the marketplace sets the rates. If your carrier raises its rates, it may lose loads to competition which means you'll have fewer miles to run. Carriers must keep their rates competitive to ensure they are operating efficiently and their gross revenue remains high.

Last time we talked about ways to control those business expenses that can get an owner-operator into trouble. But even a business that is doing well will have difficulty surviving if you can’t meet your personal obligations.

That is why it is so important to include personal expenses in your budget. The budget can help identify the costs at home that are causing you the biggest problems with cash flow. When looking at your home bills, keep in mind some of the following:

Pay Down Credit Card Debt: Credit cards should be cash management tools, not borrowing tools. If you have a lot of credit card debt, develop a plan to pay down one card at a time. You can also work with a reputable credit counseling service to set up a debt management program.

Sell Extra Cars and Trucks: If you are on the road most of the year, extra cars, trucks, motorcycles and boats are not getting used a lot anyway. Eliminating the payments and insurance will save a lot over the course of a year.

Evaluate Insurances: Insurance is necessary but have you shopped around lately? It may be worth it to get some new bids on home or auto insurance.

Minimize Entertainment Expenses: Going out can be expensive, especially if you’re adding in the cost of a babysitter. Try going out less until your financial situation improves, or search for low-cost or free alternatives to dinner and a movie.

Explore Every Option for Reducing Household Expenses: Turn the heat down when no one is home. Eliminate extra phone lines that aren’t being used. Can you reduce your cable bill? You can often find many ways to eliminate or reduce household expenses once you are aware of what you’re spending every month.

Eliminating expenses is not always easy. When you’re starting out as a new owner-operator, it is especially important to keep personal expenses in line. Over time, you’ll be able to build your business while learning how to increase your revenue and control costs, which will allow you to upgrade your personal lifestyle. But for now, don’t overspend. Learn to live on less and adjust your lifestyle accordingly.

Managing your personal expenses on a monthly basis will help to ease the stress associated with your trucking business. A budget is the best way to understand your own financial outlook so you can focus on problem areas and adjust your lifestyle accordingly.

Next time we’ll look at some cash management tips.

But what happens if your break-even miles are high and you have difficulty consistently getting those miles? One of the problems could be that your costs are too high.

Every expense, both business and personal, should be put to an honest test. Is the expenditure something that is truly necessary? Is it a lot of little things getting you into trouble or a few big things that are doing the damage?

The things needed to run a trucking business such as fuel and equipment, often get used inefficiently. The resulting waste hits where it hurts the most-in your pocketbook. The following expenses are the most common business expenses that can get owner-operators into trouble:

Truck Specs. The aerodynamic truck will provide your greatest fuel efficiency. It also yields greater load capacity, more comfort, less noise and higher profit than a show truck with a big engine and a lot of chrome.

Fuel. For good fuel economy, managing your speed, performing regular maintenance, limiting idle time and checking tire pressures are just a few of the things that will help control fuel waste.

Communication. Evaluate your cell phone plan to be sure it is cost-effective. Consider a plan that allows extended use on weekends and nights. It can be a huge money-saver when it comes to lengthy personal calls.

Road Expense. You can equip your truck with a refrigerator and microwave and save yourself up to $3,000 - $4,000 a year in food costs, while still benefiting from the per diem deduction the IRS allows you to write off. Also, consider less expensive diversions and entertainment during your downtime such as renting movies, books or exercising.

Discretionary Spending. Evaluate every purchase. Ask yourself if you are buying something you absolutely need and if it helps your business. If not, keep the money in your account.

Remember, it's not about how much you make, it's about how much you can keep. A budget is your single most important tool in keeping your expenses from exceeding your income.

In my next blog I'll talk about the importance of managing personal expenses.