A Tale of Two…Rate Markets. How 2019 Will Forever Change How You Operated in 2018
June 1, 2019 Larry. W. Long - Let’s face it, you could have made a profit as an Owner/Operator last year without any experience, education, or effort. A lot of people did. A lot of them became O/O’s for the very first time or added additional trucks to their single truck operation. Even the big boys added lots and lots of additional trucks and trailers to the mega fleets. Heck, some of those orders aren’t even filled yet and so the excess capacity hasn’t topped out. It’s safe to say that 2018 was a rare opportunity in trucking that was a result of a ”perfect storm” of record-breaking economic expansion, perceived capacity shrinkage by the highly touted fears of the ELD, and weather-related demands requiring relief effort. Last year, 2018, was the best year ever recorded in terms of revenue for Owner/Operators and many fleets. Unfortunately, that scenario is not likely to happen again in our lifetime.
A business model that was supported by the unusually inflated rates of last year will not be successful in the “normalization” of rates that is happening in 2019. With last year’s revenue, one could justify almost any amount of truck/trailer payment. Normal business expenses seemed inconsequential, and therefore, the criteria for proper buying decisions may have been relaxed. Upgrades and new purchases seemed affordable, so those risks were gladly accepted. One thing that smart business people did was . . . save cash. I said “smart” business people, because they understood that “this too will pass” and the windfall of cash will be needed on the other end of the cycle. Were you “smart” or did you spend it all? Did you take advantage of the high revenue to build up maintenance or savings accounts?
The AVERAGE van rate in all of 2018 was around $2.11/mile;presently it’s at $1.35/mile. With a .75/mile difference, many O/O’s are operating at a loss right now. Most O/O’s don’t even profit .75/mile. How will you survive with freight at this rate and it’s still likely to get cheaper! Analysts agree that we are not at the bottom yet. How will you stay in business at those rates?
I have some answers, BUT many of you will not like them. Actually most of the folks who NEED to change WON’T. They’ll post things like “I’m not hauling that cheap freight” OR “I’ll go home and wait until it gets better” or even advice like “If you idiots will stop hauling this cheap freight, the rates will go back up.” I find that one really humorous; more on it later. I have had a few BCO’s contact me for advice, based on some of my previous posts. In the conversation, instead of listening to my suggestions, all they did was defend their actions and previous poor decisions. My solutions aren’t complicated. They’re based on sound practices that I have utilized in many businesses over the nearly forty years that I have been a businessman. They aren’t even really unique to trucking. “Business is business” as my friend Kevin Rutherford says many times on his radio show on Sirius XM 146.
So, here are my “secrets.” Not really - there are no secrets, but here are ways to overhaul your business to survive and even thrive in this market.
1. Know who your CUSTOMER is.
This is not as obvious as some may think. Improve your relationship with the customer to provide unparalleled, excellent service that no one else can duplicate. That’s the easy part. 99% of O/O’s won’t do this so you’ll stand out easily if you do.
2. Lower your cost of doing business.
Be tough on yourself here: what are you spending money on that you can cut out, find cheaper or even sell if it isn’t making you money? For example, is that trailer really making you a profit or is it just nice to not have to pull a company van? Do you have too much truck? Customers don’t set their rates based on how new the truck is that pulls up to the dock. An older truck that has been well-maintained can significantly lower your operating costs. Putting the money for a truck payment into a maintenance account instead will insure that you are prepared for any breakdowns. Besides a new truck warranty doesn’t cover your down time any more than an older truck being down. Do you understand how purchasing fuel (your number one expense) can be optimized? Do you understand how to increase the fuel mileage in your truck? (Hint…YOU are the number one way to improve it and it costs you nothing to fix!) Do you know what kind of fuel mileage your tires are costing you? These are just a few examples of many ways to lower your operating costs.
3. Increase your revenue.
That’s simple enough, right? Well, it is if you lower your costs because now there is a hell of a lot more freight on the load board or with your favorite agent that you can now haul at a profit. Set a weekly or daily revenue “budget” and meet it. Stop worrying about the rate per mile. (See, I told you that you wouldn’t like my answers!) Rate per mile is a distraction. At Landstar, focus on “dollars to the truck.’ After all, with the ELD you can’t drive more miles per day anyway.
4. Determine your cost per mile (CPM).
Knowing your cost per mile is critical for several reasons, the least of which is knowing whether or not a particular load that you’re looking at can be hauled profitably. To find your cost per mile, you will need to have a simple bookkeeping system, spreadsheet, or cigar box to track your expenses so that you can figure out what it costs you to operate your truck based on historical data. If you have a tax preparer, you could probably get by with using your last year’s tax return as a starting point. Armed with the knowledge of your cost per mile, you can now see if there are loads that you previously would not have hauled that you can haul profitably. These additional loads are going to help increase your revenue.
5. Get a handle on your household/personal expenses.
Will your 2019 revenue be sufficient to support your current lifestyle? You may have to make adjustments just like you did in cutting costs for your business if necessary. A program such as Dave Ramsey’s Total Money Makeover is a very good way to help you with this. Don’t make the common mistake of judging the profitability of your business based on your ability to support your lifestyle. Let’s face it, if you have two houses, a Harley, a bass boat,and two girlfriends, well, you might need to look into becoming a neuro-surgeon or a rocket scientist. Trucking is probably not going to provide the income to support that. The best run O/O model in the country would have trouble with that example. I’m being facetious, but you get the point. By keeping your household and your business separate, you will be able to analyze the success or problems in your TRUCKING business and your lifestyle is a whole different matter. (Again, refer to Dave Ramsey’s book on that).
6. Become a bookkeeper.
Use basic spreadsheets or buy a basic off-the-shelf accounting program or use an online product such as “Profit Gauges”. You will be a much better business person if you keep up with your own numbers on a timely basis. Hire a trucking-experienced tax preparer or CPA to do your tax returns. But, do your own bookkeeping so that you know your numbers and you know them in “real time” and without delay. Using a service doesn’t give you the intimate knowledge of your numbers and there is a significant delay between the time that you have the transaction versus the time you get the reports. An important thing to remember when deciding to increase revenue versus cost: When you increase revenue by one dollar, you only get to keep the profit from that one dollar. When you cut costs by one dollar, you get to keep the whole dollar. So, the strategy here is that it is far more effective to cut costs rather than increase revenue although both strategies will help your bottom line.
Summation
These simple concepts, although not necessarily easy to attain, are the roadmap to your success in a challenging market. The good news is once you have implemented these strategies, you will be positioned for high profit margins when the market improves again.
If this was helpful and you need more of a “deep dive” into each strategy, or you want to learn more about business and would like to participate in a series of in-depth webinars where we will explore all of these concepts extensively plus many more, watch for an exciting announcement coming soon at www.BlueRibbonLogistics.com