Cost per mile (CPM) is a clear, concise way to save time and evaluate financial success so you can easily decide how to run your fleet efficiently. Cost per mile compares the operating costs of your fleet against the number of miles that your trucks drive. An optimized fleet maximizes their CPM and reevaluates this number regularly to continuously improve the output. Start by itemizing your operating costs and evaluating your current truck mileage. Then, review ways to reduce costs or increase mileage-based profit and decide what is best for your fleet.
Operating cost includes any cost associated with running your company. Typically, that includes fixed costs, variable costs, and salaries. It’s not enough to have a general sense of your costs. To run a finance-savvy company, define operating costs clearly. Detail costs to the point that they capture each transaction. Precision is extremely important when calculating operating costs because ignoring small costs or generalizing with rounding can quickly snowball into a completely inaccurate picture of your finances. Once you have a clear picture of your operating cost, use this to calculate your cost per mile.
Using Cost Per Mile
Understanding your Cost Per Mile allows you to save time while making financially sound decisions. A baseline cost per mile is a reflection of the cost of each mile your trucks drive. Fleets can calculate CPM by comparing your operating costs to the miles your trucks drive. This rate should inform the rate that you charge shippers and will also highlight any financial red flags. Profitable businesses have load rates that are (on average) higher than the company cost per mile. Being confident in the cost per mile rate allows owners to better identify costs and optimize spending.
Profitable businesses have load rates that are higher than the company cost per mile.
There are three main types of costs to account for when calculating your cost per mile rate. Because some of these costs will change frequently, your cost per mile will be a fluctuating rate. As a result, reassessing regularly is key. Monthly or quarterly is a good place to start.
As the name suggests, fixed costs are the expenses that stay the same month after month. You will incur these costs regardless of whether your trucks are running miles or sitting on a quiet lot. Permits, insurance, and property lease payments are a few examples of common fixed costs. Typically, fixed costs are very consistent.
Variable costs are the counterpart to fixed costs. These expenses will fluctuate over time, sometimes minimally, other times dramatically. Unlike fixed costs, variable costs are closely tied to how much you run your trucks. Diesel fuel, maintenance, food, and lodging are all variable costs. The more you run your trucks, the higher these costs will be, but that’s not necessarily a bad thing.
In many ways, salaries are a variable cost, but they deserve a third category because salaries have such a big impact on CPM. Typically, salaries are one of the biggest recurring costs. Like other variable costs, the more miles that trucks run, the more the variable cost increases.
Becoming More Profitable
While there are typically several large, upfront costs associated with launching a new company, truck cabs and trailers actually are not the biggest cost long term. According to the Truckers Report, fuel is by far the greatest operating expense. Based on their estimations, diesel fuel can account for a whopping 39% of operating costs. Driver salaries come in as the second-highest expense at 26% of total fleet operating costs. Assuming your goal is to create a more profitable yet sustainable business, you have two options.
Reduce Operating Costs
Cost per mile is a rate. Therefore, you can change either factor (operating costs or miles) to shift the balance in your favor. One way to do this is by cutting operating costs. In some cases, calculating your CPM may have highlighted several areas of extraneous spending. Others might already be running a lean mean operation. Think carefully before you decide whether and where to cut your budget. Some decisions, such as decreasing driver salaries, may seem appealing because they can dramatically reduce costs. However, the long-term effects might not pay off if that leads to higher turnover and increased recruitment costs. Consider the short and long-term effects.
Increase Gross Income
The other way to grow your company’s profitability is to increase income. Raising load rates is one way to do this. Quite simply, a higher load rate will mean better returns on your loads. Another option is to run more miles. In this case, fixed costs stay the same, and variable costs are proportionally reduced. As a result, the CPM rate drops.
Understanding how to calculate your cost per mile rate will help save you time when you need to make critical financial decisions. A keen understanding of the balance between decreasing operating costs or increasing gross income is fundamental to growing profitability. To be a top trucking company, analyze your CPM rate regularly to effectively respond to industry or fleet-based changes.