The truck driving business looks poised to rebound in 2022 after almost years of disruption. But is the trucking business profitable? What should a trucking company do to stay profitable?
Let us look at the trucking industry’s short-term and long-term outlook. We will also take time to review how trucking companies make money and what profit margins are like in the business.
In an industry where business was already struggling before COVID-19 hit, trucking companies saw their fortunes turn even worse when the coronavirus outbreak began spreading across the globe. But there’s reason to believe they could be turning a corner now. In March 2019, the TCI was at its highest level since January 2016 when it reached +9.91.
After falling for three straight months following its July 2019 peak, the S&P 500 Index bounced back in September and then again in October. By early November, the index was up nearly 10% from It dropped again after hitting its highest point since February 2020. However, it has now recovered and reached a new high of 17.28 in April 2021. These increases reflect improvements in freight volume, rates, and capacity utilization.
Avery Vise, Vice President of Trucking at Freight Transport Resources (FTR), says he sees a full recovery for the trucking industry by the end of next year, which would lead to stronger results in 2020 than expected. A lack of qualified drivers has been delaying full recovery from Hurricane Harvey. Social distancing has led to an increase in the number of drivers available for hire.
Shipping velocity refers to the number of shipments per day, week, month, etc., says transportation industry veteran Damon Langley, co-founder and managing director at Velocity Transportation Solutions (VTS). If you want to increase profits, then you need to be able to decrease expenses without sacrificing quality.
You can express this idea mathematically by using key performance indicators (KPIs) which measure key velocities driving your revenue, such as:
1. Miles per driver per week
2. Pay per driver per week as a percentage of company revenue
3. Revenue per hour generated by customer service representatives soliciting freight
If you're considering starting up a trucking company, then don't worry too much about profitability right now; just get started! It may not always be easy but there’s nothing wrong with trying hard.
Trucking companies' failure rates increased even before COVID-19 hit, according to new figures from industry research group Broughton Capital. One part of the problem in recent times has been that while prices for fuel have fallen, wages paid by drivers haven't kept up with the drop in price. In addition, the shortage of drivers exacerbates this problem.
If FTR's prediction for a third-quarter recovery in 2021 turns out to be correct, then there won't likely be any driver shortages by 2022. If they can develop a solid financial strategy, then this could leave them some wiggle room for when the economy turns up again. There is always some level of risk when starting up any business, but if you're willing to take risks then there might be an opportunity out there for you.
The most important step to be a successful owner-operator is to support the right market niche. This step affects small fleet owners as well. The market you choose determines the equipment you buy, the rates you charge, and the freight lanes you can service.
As a rule, owner-operators should focus on markets that the large carriers avoid. In other words, consider hauling specialized loads.
As an owner-operator, you need to determine what rate to charge your clients to haul a load. Your rates need to be high enough to give you a nice profit and pay all your operation costs.
You need to know your rates before you start calling shippers and making sales. Remember, when you call shippers, you want to be competitive with what brokers charge them.
There is a simple way to do this:
a. Select your freight lane
b. Find 10 loads going in one direction
c. Call the brokers and find out how much they pay
d. Get the average
e. Add 10% to 15% to get the price brokers to charge shippers
f. Repeat the process in the opposite direction
Knowing your operating costs in detail is important. Otherwise, you have no idea whether you will make a profit.
Determine your fixed costs. These are costs that stay the same regardless of how many miles you drive. Examples are truck payments, insurance, permits, and so on.
Now determine your variable costs. These costs depend on the number of miles you drive. For example, fuel is a variable cost. The more you drive, the more fuel you use.
Use your fixed and variable costs to determine your “all-in-cost per mile.” This figure is very important. If you subtract your “all-in-cost per mile” from your rates (calculated in step #2), you get your profit – the amount of money you keep.
Fuel is the largest expense for owner-operators. However, new and experienced owner-operators often buy their fuel incorrectly. They think that the cheapest pump price provides them with the cheapest fuel. This approach is wrong. You could lose hundreds (or thousands) of dollars by doing this.
The issue is taxes. Regular drivers pay fuel taxes in the state where they purchased the fuel. Truck drivers, on the other hand, must deal with IFTA. Truckers pay taxes based on fuel used as they drive through states, regardless of where they bought the fuel originally.
Load boards and brokers have their place in your business. They can be very useful when you have an empty truck. However, they are also very expensive. Brokers keep about 10% to 20% of the load price. That's fair, as they must make a living and they provide the shipper (and you) with a service.
Minimize your use of brokers and load boards. Instead, develop a client list of direct shippers. Done right, you can develop a list of reliable shippers that will keep you busy. Charge them a price that is competitive to what brokers charge – but keep everything for yourself instead. We have written the following resources to help you grow your shipper list:
Having an efficient back office is key if you want to stay profitable and grow. The importance of the back office becomes more important as you start adding leased drivers to your operation. You have a couple of options.
Trucking is a cash flow-intensive business. You are always buying fuel, making insurance payments, making truck payments, and so on. Unless you get quick-pays, shippers and brokers can pay invoices in 15 to 30 days. Sometimes they take 45 days. This delay can create a cash flow problem for you, especially in the early days of the business.
One way around this problem is to use freight bill factoring. Factoring solves your cash flow problem by advancing up to 95% of the invoice, often the day you submit it. The remaining 5%, less a small fee, is rebated once your shipper pays. Many factoring companies provide fuel advances, cards, and other services as well. By the way, we are a factoring company. If you need factoring, fill out this form and a credit manager will contact you shortly.
In addition to a sound business plan, you also need a reliable, efficient DOT Consortium like Labworks USA. Why? Because DOT/FMCSA compliance should be a priority.
With our support, you won't need to stay afloat with your DOT and FMCSA compliance. As a consortium third-party administrator, we provide truck drivers and carriers across America with compliance services for a wide range of DOT/ FMCSA requirements.Back to Blogs