Trucking is a highly competitive industry with slim margins. The truck freight rate you charge will have a significant impact on the volume of loads you haul and your bottom line profit. Charging the best freight rate is a balancing act between what shippers are willing to bear and what your trucking company needs in order to cover all costs and generate a profit. Truck freight rates are influenced by the market demand for capacity and your trucking company’s unique cost-per-mile. The key to success is to find this balance, work smart and operate at high efficiency to maximize loads moved on both the outbound and backhaul legs of a trip.
Know your cost-per-mile
From a business perspective, knowing your unique cost-per-mile is the most important information you need to understand about your trucking company. This information is vital in order to manage operational decisions and when setting a competitive truck freight rate that will cover all costs associated with running your business. Because the industry is so turbulent with freight demand and operational costs fluctuating constantly, monitoring your cost-per-mile needs to be a regular exercise.
The real cost for your trucking company to deliver a load is far greater than just the running expense of operating equipment, driver wages and covering over-the-road expenses. Overhead, empty miles, and annual costs such as taxes and insurance all need to be considered. To be profitable, you must account for every dollar spent, including the coffee you buy while on route.
It is highly advisable for trucking companies to take careful record of all expenses and produce monthly financial statements. Analyze these reports regularly and if necessary, consult with an industry experienced bookkeeper or accountant to best control finances. With this data, use of an online cost-per-mile calculator is a simple exercise to determine your trucking company’s unique cost-per-mile. Conduct the calculation at least once a month to monitor expenses and regulate your truck freight rate to maintain profitability. The formula to achieve bottom line success is to maximize loads moved and ensure your truck freight rate is higher than your cost-per-mile.
Know what shippers are willing to bear
With the knowledge of your current cost-per-mile, setting a truck freight rate now becomes an act of comparing market demand and competitive rates to your needs. When demand for capacity is high, truck freight rates can be inflated substantially with less concern about competition. The spot market record-breaking rates during the first half of 2021 is an example of this. As long as shippers are desperate to have loads moved, they will pay whatever is necessary to transport their freight. Raising truck freight rates well above your cost-per-mile and using excess revenues to build a healthy cash reserve is a good strategy for being prepared for the leaner times that is sure to come when freight demand declines.
Setting a truck freight rate during periods of low demand, or even in a normal market requires more consideration – competition becomes a greater part of the equation. Now it’s a balancing act on a tight rope, a thin line between covering your cost-per-mile and being competitive enough to win business.
Following are recommended steps to measure competitive rates:
- Select a freight lane.
- Go to a load board (or several) and select 10 comparable loads.
- If the price is not posted, contact the brokers and add 10% to 15% to get the price brokers charge shippers.
- For each load – divide the miles by the posted rate to calculate rate per mile.
- Determine the average truck freight rate.
- Repeat the process for back haul.
This information provides a measure for comparing your company’s truck freight rate to the average competitive rate. Use the results to adjust your rate accordingly while ensuring the end result is a truck freight rate that exceeds your cost-per-mile. Bear in mind that the rate you use can be pushed higher if your trucking company has a recognized reputation for safe, reliable service.
Of course, the truest measure in determining if you are using the right truck freight rate is the level of success you have in booking new loads. If you are booking loads faster than you can handle, perhaps your truck freight rates are too low. If on the other hand your trucks are idle due to a lack of loads, yet the competition is busy hauling, you either have a reputation problem or your truck freight rates are too high.
How to maintain profits
There are only three key actions you can take to positively impact your trucking company’s ability to improve profits:
- Increase your truck freight rate
- Reduce costs
- Drive more loaded miles
When freight demand is high, it’s time to increase your truck freight rate, drive hard, bolster your bottom line and build cash reserves for the future. When demand drops and truck freight rates suffer, its time to work hard on your business. Controlling costs and lowering expenses is the most effective way of protecting profits – a dollar saved has a far greater positive impact on your bottom line than a dollar earned. Take the time to assess operational efficiencies and cut or reduce whatever expenses you can. The first and most important expense to consider is fuel, the largest of your operating costs. Ensure your drivers follow proven operating practices to be most fuel efficient. If you don’t already have a fuel discount program, GET ONE! eCapital provides a robust fuel card program to trucking companies of all sizes. The ongoing savings, convenience, cost control and driver benefits associated with the use these cards will have a huge positive impact on your trucking business.
Improve cash flow to enhance bottom line
The tighter your profit margin, the more you need steady, reliable cash flow to run efficiently. With little room for additional costs or lost business opportunities, having the available working capital to keep hauling is critical. The reverse is also true – if you are running hard and growing the business, then odds are your customers are not paying your invoices fast enough to keep up with running costs. For both reasons, freight factoring continues to grow as a popular funding option to improve cash flow and gain immediate access to working capital.
Plan for the future
While rates are high, drive hard and prepare for the future when shippers regain advantage of controlling market trends. Start now to build efficiencies into your operations as best as possible and use this advantageous time to negotiate best contract rates. High rates and profits provides your opportunity to invest in technology improvements, more fuel efficient working equipment, or operational expansion to meet demand. But, always keep your eye on the future and the inevitable drop in rates that is sure to come.
Plan for the future by:
- Developing the practice of regularly monitoring your cost-per-mile. Learn to use this information to guide your truck freight rate and managerial decisions.
- Building a cash reserve.
- Streamlining services and building the organizational structure to monitor and control costs.
- Set up a working relationship with a freight factoring company to create a flexible funding solution to support growth or manage financial shortfalls when times are tougher. Freight factoring is a mainstream financial strategy to smooth out cash flow and provide easy access to working capital.
Taking these actions now will best prepare your trucking business for when the next slump in the market hits. Meanwhile, take advantage of the favorable market conditions that supports high rates and build your company’s organizational, operational and financial strengths.