Being profitable as a business owner in any industry can be a challenge. And it's especially true for carriers in the trucking industry.
With already thin margins, you need to manage your expenses and continuously improve your processes and systems for greater productivity. This is easier said than done.
This is easier said than done. Start by asking some tough questions, such as:
What are the areas of business that directly impact your profitability?
Which of these is performing at subpar levels?
What is their ranking of profitable importance?
Answering these can help you determine the most impactful areas to focus your improvement efforts.
If this question and answer process starts to feel overwhelming due to the sheer amount of assets you have there's no need to worry. Loadsmart has built a profitability calculator to help you figure out answers without mathematically breaking the company apart yourself.
What is profitability and what are the inputs?
The profitability of a company is influenced each time money comes in and goes out. Some are fixed costs that you should always work into your pricing structure. However, others are variable costs that can change from month to month, or load to load, and can impact your margin in unexpected ways.
Let's break these down to understand what your costs are and how they influence your overall profitability. Fixed costs are those such as rent or lease costs, utility bills, insurance, salaries, and loan repayment. Variable costs include items like equipment costs, repairs, supplies, credit card fees, fuel costs, and taxes.
To figure out your profitability for any given month, pull out each of your costs, whether fixed or variable. Add these to find your total expenses and then subtract that number from your total revenue from the same period. You can figure out your year's profitability by doing this for each of the months and adding the month's profit calculations together.
Similarly, you can predict future profitability. Take all your fixed costs for each month and add them together for your desired predicted period. Then, take an average of the total variable costs. You will typically want to average over 12 months to account for seasonality. Then multiply the average by the same period as your fixed costs and then add them to the fixed total and subtract that from revenue to estimate your total predicted output.
Future Profitability = Average of 12 Months of Revenue - Average of 12 Months of Expenses
If you already know your jobs for that period, you can add their profits together and subtract the output from them. If not, estimate using the same method as you did for the variable costs number. This will give you your future profitability for any given period. The further out you try to predict, the higher the margin for error because of unexpected circumstances.
Another area where it's important to monitor is your profit margin. This tells you how much money you're making in profit as a whole and can also be used to evaluate any job. To find the margin, divide gross profit by the revenue.
Calculating profit margin
Profit Margin = Profit / Revenue
One specific reason to watch your profit margin is to benchmark your company against others in the industry. The average profit margin for trucking companies averages between 2.5% and 6%.
You can also break down these numbers by trucks, drivers, lanes, or lines of business to make sure every area is contributing to your bottom line.
What is breaking even?
Breaking even happens when your output costs and your profits end up being the same. That means you have no profitability, but that you haven't gone below zero for the quarter either. Breaking even, while not as positive as being highly profitable, is not always a bad thing. For example, if you are just starting, you may lose money or break even in the first couple of years. This might also be the case if there are large changes that happen to your fixed or variable costs, like a sudden hike in rent.
However, if you are breaking even when you should be profitable, it can point to problem areas in your business.
Although the above explanation for how to calculate your profitability might seem like a simple one, it is rarely that straightforward in real life. There are numerous places where the money goes in and out of a business, all kinds of assets that either need maintenance or regular updates, salaries to pay at different levels, and changes to the customers and jobs that you get each month.
The real challenge comes in when it is time to collect all of this information. It often comes in bits of fragmented information across scores of spreadsheets, receipts, bills, and invoices. It can feel more like piecing a thousand puzzle pieces together rather than doing simple arithmetic. Luckily, carrier support systems like Kamion powered by Loadsmart were made to take care of both the puzzle and the math for you, consistently providing you with a clear picture of your business's profitability.
The profitability calculator
Kamion is a truck management system (TMS) that enables carriers to more efficiently manage and automate their supply chain. Since it keeps track of all your business's ins and outs, it simultaneously manages your profitability numbers.
By having access to this level of technology, carriers finally can optimize their system and remain in the loop of the impact their own business is having. If you want to be one of these carriers with a thorough understanding of their business's inner workings, download the profitability calculator from Kamion today.