Plan Ahead for Freight Rates

Use This Summer Heyday as a Great Time to Plan Ahead Rates are high this summer, so plan now to survive those guaranteed lean times on the horizon

By Jennifer Lickteig Freight rates have been really good for a while now. That’s great news for truckers, especially after the economic hardships early last year. Lane rates are high, the economy is opening up again, and this summer is projected to be robust for the transportation industry. But when times are good, it’s easy to forget that what goes up will ALWAYS come down, especially in our notoriously cyclical trucking industry. This fat summer isn’t sustainable long-term, so it’s important to recognize that a financial winter is coming. It always does. Let’s take it back. History has shown that when freight rates are high, many drivers will leave their carrier and try to make it on their own. Unfortunately, many of these start-ups will fail the first time freight rates fall. Why? Falling behind on truck payments, not being able to afford insurance, and incurring other unplanned expenses are some of the main reasons why small companies or new owner-operators have to close up shop. The solution to keeping those big rig wheels turning is to make and execute a business plan that helps you prepare for lean times, so you won’t have to make desperate choices under pressure. That advice may sound strange coming from someone like me, whose company makes money helping truckers who are in a cash crunch, but I believe the trucking industry is a family. The only way for us all to survive and thrive is to look out for each other. It’s time to make your money while the sun shines and have a business plan ready for the lean winter months ahead. It’s not as hard as it sounds, so let’s get started.

Step #1: Determine Your Rate Per Mile

Cost per mile is the total cost of what it takes to keep your trucking operation going for every mile you drive, not just the miles you get paid for. You need to know your cost per mile so you can determine how much money you need to charge for those miles you DO get paid for to break even and make a profit. There are a lot of factors to consider, but it comes down to a simple equation: total expenses (fixed plus variable) plus desired profit/salary divided by total miles driven (both paid and unpaid). Time to break that down.

Determine how many miles you will drive in one year

If you’re not sure how many miles you’ll drive, a good estimate to use is 100,000 miles per year. Using a more accurate number is better, so do your best to anticipate how much you’ll be driving. Also, keep in mind that your estimates should include total miles, including deadheads (unpaid miles with an empty trailer).

Calculate your fixed expenses

Fixed expenses are all the things you must pay for no matter how many miles you drive: things like insurance, licensing fees, permit fees, truck loan payments, and

cell phone bills. The largest fixed expenses are usually truck loan payments and insurance. Add up all your fixed expenses and divide that number by the 100,000 annual mile estimate or your actual miles driven for your fixed cost per mile.

Calculate your variable expenses

Variable expenses change depending on how much you drive. They include things like fuel and truck maintenance, food, lodging, tolls, broker fees, and factoring fees. Calculate your variable cost per mile by adding all your total variable expenses and divide that number by the 100,000 annual mile estimate or your actual miles driven.

Pay yourself

Your profit margin (or driver pay) is what you pay yourself once all your fixed and variable costs are paid. The margin you need/ want is completely up to you, but you must factor it into your cost calculation. Consider your nontrucking expenses: mortgages, rent, car payments, food, medical and so on. Your profit margin will need to cover everyday life expenses with enough left over to get you through those lean months that always come. And ideally, your profit margin should also be enough to cover you in retirement. Divide your desired profit margin by the 100,000 annual mile estimate or your actual miles driven to get your margin per mile. Add all three numbers: fixed costs, variable costs, and profit, to determine your rate per mile. The purpose of knowing these numbers and having a solid plan is to be equally prepared for the days you’re making huge margins AND the days when you’re barely above break-even. Also, keep in mind that not every load is going to meet your desired profit margin. There may be loads that come your way with thin margins, and it may be tempting to hold out for a load with higher margins. However, it can sometimes be better to take a lower margin load and stay working during cyclical downturns than it would be to wait for something better to come along. Working your plan and making your ideal rate (on average) for the year is the goal. Thin- margin loads can sometimes be useful, and knowing your numbers will help you better determine what’s best for your bottom line.

Step #2: Understand Cash Flow

How much money you make is only half of the picture. Of equal importance is when you get paid. To stay in business, your cash needs to come in at least as fast as you’re spending it. For some owner-operators, that means deferring some expenditures (such as food, fuel, and maintenance) by putting those charges on credit cards. This is called “debt financing.” The risk of debt financing is that every time you use that card, you’re promising to repay the bank the money you borrowed, plus interest. Unpaid debts and interest add up fast when freight rates are low and business is slow, so be careful with debt financing. Factoring companies provide cash directly to owner-operators and collect payment from shippers and brokers. In recourse factoring, the factoring company charges a lower fee, and the owner-operator is responsible for the debt if the shipper or broker doesn’t pay the bill. In non-recourse factoring (the most popular arrangement) the factor charges a slightly higher fee and takes on the risk of nonpayment. There are many other benefits to establishing a factoring relationship, including free customer credit checks and risk mitigation, but the biggest benefit of factoring over using a credit card is being able to avoid the slippery slope of debt financing and not needing to use personal credit to qualify. What about Merchant Cash Advances (MCAs)? Online banking has created a new kind of lender that markets itself like a factoring company but is something else entirely. These types of lenders offer MCAs at deceptively low interest rates. The catch is that the rates are weekly, not annual, and the loans have very short repayment terms. These lenders require direct access to your bank accounts and can withdraw the loan money at any time. Even worse, if a borrower falls behind on payments, these companies will sometimes offer an additional loan on top of the initial advance, a practice known as stacking. MCAs can quickly spiral downward, and owneroperators have lost their trucks and their life savings by using them. Do your research before jumping on a low rate! Step #3: Enjoy the Summer and Know

You’re Prepared for Winter

All in all, it’s a true heyday in the transportation industry right now. Take advantage of it! But winter is coming; it always does, no matter how lucrative times have been thus far. So don’t be left out in the cold when freight rates drop. Make a plan and work it. Understand every aspect of your cash flow. Making the jump from a carrier to becoming your own boss is a big step, so plan out your numbers, and know that there are factoring companies who are here to help. Jennifer Lickteig is the CEO/ President of TBS Factoring Service, a member of FTA.