Profitable motor carriers know their break-even point (BEP) and use it to set their hauling and delivery rates. Many truck drivers own their own rigs and, in addition to complying with many federal laws, must also establish themselves as small business owner-operators.
Small business owners must have a basic understanding of bookkeeping and accounting. Your BEP should be at the heart of your trucking operations, and independent owner-operators should know how to calculate and deploy the break-even point that can make the difference between profiting and failing.
From an accounting standpoint: the break-even point is the point at which your business expenses and income are equal.
Knowing the break-even point for your trucking business will ease your mind and help lead you down the path to prosperity and success. When you get away from using the BEP as the core of your pricing, you are taking unnecessary risks. The truck driver who hits their break-even point plus their profit margin on each trip will be profitable and ensure their financial viability.
The Break Even Point Formula
Variable Expenses + Fixed Expenses = Break Even Point
The formula above is used to calculate your break-even point in revenue required to cover your costs. Fixed costs are those costs that must be met whether the truck is on the road or not. Variable costs are those costs that fluctuate by volume.
For trucking businesses, variable costs are best considered as “variable in nature,” or costs that vary depending upon the level of work done. Trucking variable costs include:
- Truck fuel
- Truck repairs
- Tire replacement
Trucking fixed costs include:
- Truck insurance
- Truck driver wages
- Any costs that would be incurred even if the truck was not in use
While many owner-operators focus on their variable costs, it should be noted that the higher the fixed costs, the higher the break even point is. And, the higher the break even point is, the more will need to make in revenue per load in order to reach the BEP.
The Bucket Method
Because many truckers do not have degrees in accounting or bookkeeping experience, one accountant working with a trucking firm in Alberta gave birth to the Bucket Method. The Bucket Method was devised to help truckers better understand how much product or service they need to achieve in order to reach their BEP.
The relationship between fixed costs and variable costs is extremely important. Every trucker should understand these costs and be able to identify which expenses fit into which bucket. Expenses should not be lumped into one giant pool. They must be identified and placed in the proper bucket for the system to work.
With the Bucket Method, fixed costs, those costs that do not change as revenue levels change, include wages, licenses, insurance, lease and other similar costs. All fixed costs are placed in one bucket. Variable costs are in another bucket, such as fuel and maintenance.
When the revenue is determined, the difference between revenue and variable costs determine what is known as the Contribution Margin or the amount the trucker has left over to contribute to the fixed cost bucket.
Knowing the break even point is a much more effective means to a profitable trucking business than simply relying on a per-mile rate. Some expenses cannot be figured on a per mile basis. Identifying your break even point will ensure that all our fixed and variable costs can be met and that you can operate profitably.