There are some important ratios that trucking companies can use to quickly calculate their profitability. All of these ratios measure costs, revenue and profit in terms of miles. There are also software packages that can make calculating these metrics easier. However, knowing these ratios ahead of time allows you to make quick decisions if needed.
Cost Per Mile
The cost per mile calculation is simple, but important. The equation is:
CPM = Operating Expenses / Miles Driven
The key is to make sure you use the same time period for miles and operation expenses. If you use a miles driven figure for a month, and operating expenses over a quarter, your calculation will be incorrect.
Here is an example of a cost per mile calculation. In a given month, if my operating expenses are $20,000 and I have driven 18,000 miles, my CPM is $1.11.
Revenue Per Mile
Revenue per mile is also important and can be calculated as follows:
RPM = Revenue / Miles Driven
Again, make sure the time period being used to add up miles driven is the same period used for operating expenses. For example, if revenue in a given period is $28,000 and I have driven 18,000 miles the RPM is $1.56.
Variable Profit Per Mile
Once we have the CPM and RPM we can simply calculate the VPPM as follows:
PPM = RPM - CPM
This is the variable profit per mile. Every mile you drive you earn this amount of money. For example, if my RPM is $1.56 and my CPM is $1.11, my PPM is $0.55.
When deciding whether or not to take a load, you should calculate RPM and CPM, but you must also account for the miles driven without a load (dead heading). Anytime you are driving with no cargo, the miles driven add only to your costs.
For example, my RPM on a given load $1.55 and my CPM is $1.11. The route is 500 miles, but I have to drive 300 miles to get there. In this case, because of the 300 dead head miles ($1.55 * 300 = $333.33) I would actually lose $113 on the load.
To calculate VPPM when dead heading the equation is:
VPPM = (RPM * LM - CPM * LM) - (CPM * DHM)
In this equation LM = loaded miles, and DHM = dead head miles.
Another element the VPPM equation does not account for is fixed costs. CPM and RPM both deal with variable revenue and costs. There is a lot of debate on how to account for fixed costs. Some advocate a fixed cost per mile figure, and many advocate a fixed cost per day figure.
A prevailing opinion is that truckers should know their fixed cost per month. However, fixed costs should not be factored into the decision on whether or not take an individual load. The goal in trucking should be to maximize variable profit in any given month. Any variable profit (VPPM) that is obtained goes to the bottom line and is covering fixed costs.
We often hear that if a profitable load is offered that won't ship for 4 days, the profit is less. This is true, but not because of fixed cost. It's not as profitable because you can't maximize VPPM sitting in the parking lot. Fixed costs have nothing to do with it.
While fixed costs should not be factored into load decisions, they should be factored into the decision to be in business at all. If the VPPM being taken in is less then fixed cost, you need to question whether or not to be in business in the first place.
Remember, the goal is to maximize VPPM each month. Factoring in fixed costs only makes the decision more confusing.