Introduction
Understanding your cost per mile (CPM) is crucial for any owner operator in the trucking industry. Calculating CPM accurately provides the foundation for making informed business decisions and achieving financial success. For owner operators, CPM determines the baseline health and profitability of your business.
Knowing your precise CPM empowers you to set competitive yet profitable rates when dealing with brokers or shippers. It enables making smart choices regarding routes, loads, and operational strategy to maximize earnings. Tracking CPM over time gives insight into how changes impact costs and bottom line profit. As an owner operator, your CPM is the core metric that underpins your financial planning, growth opportunities, and long-term viability.
In short, CPM is the most fundamental calculation for owner operators. It provides the key data needed to make strategic decisions, negotiate better rates, and ultimately drive the profitability of your trucking business. That's why taking the time to accurately determine your cost per mile is so crucial. This guide will walk you through the steps to calculate your real-world CPM.
Step 1: Gather Your Expenses
Start by gathering all your operational costs. These typically fall into two categories:
Fixed Costs
These are expenses that remain constant regardless of the miles you drive. They include:
- Truck payments
- Insurance
- Permits
- Licenses
Variable Costs
These costs fluctuate based on the distance you travel. The most significant variable cost is fuel, but others include:
- Maintenance
- Tires
- Tolls
Fixed costs stay the same each month, while variable costs change depending on how many miles you drive. Be sure to account for both when calculating your CPM.
Step 2: Calculate Monthly Costs
Once you have all your expenses, total them up on a monthly basis.
- Go through each expense and add up the amounts paid over one month. Include expenses like:
- Truck payment
- Insurance
- Permits
- Fuel
- Maintenance
- Tires
- Tolls
- Don't forget to include less frequent costs like annual insurance premiums or quarterly tax payments. Divide these annual or quarterly costs by the number of months they cover to get a monthly amount.
- For example, if your annual insurance premium is $6000, divide $6000 by 12 months to get a monthly insurance cost of $500.
- Add up all the monthly expenses to get your total monthly costs. Having an accurate total for monthly costs is crucial for calculating an accurate CPM.
Step 3: Determine Your Monthly Mileage
Track the total miles you drive each month. A precise way to do this is by using your electronic logging device (ELD) data or maintaining a detailed logbook.
ELDs provide automated and tamper-proof records of your hours of service, distance traveled, and associated data. They connect to the truck's engine control module to accurately record mileage driven.
Alternatively, keep an accurate paper logbook of all your trips. Recording date, origin, destination, start/stop odometer readings for each trip. Then sum the total mileage at month's end.
Having precise monthly mileage records via ELD or logbook enables accurate per-mile cost calculations. It also provides documentation for tax purposes. Don't rely on rough estimates - diligently tracking all miles driven is essential.
Step 4: Calculate Your CPM
Now that you have your total monthly costs and total monthly mileage, it's time to calculate your cost per mile. This is done by dividing your total costs by total miles driven.
The formula is:
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Total Monthly Costs / Total Monthly Miles = Cost Per Mile (CPM)
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To show this in an example:
* Total monthly costs: $10,000
* Total monthly miles: 20,000
* $10,000 / 20,000 miles = $0.50 per mile
So if your total monthly costs are $10,000 and you drove 20,000 miles that month, your CPM would be $0.50.
This gives you your true cost per mile driven for the month. It encompasses all your expenses - fixed and variable - and provides an accurate picture of your operating costs.
Step 5: Factor in Profit
Calculating your operating cost per mile is one thing, but you also want to make a profit as a trucking business owner. An important next step after determining your CPM is to add a profit margin on top of this base rate. This gives you a complete rate per mile that you can use to improve your financial position.
When negotiating rates with brokers or shippers, do not simply quote them your exact CPM. Instead, add an additional amount as your desired profit. A general guideline is to add at least $0.10 - $0.30 per mile on top of your fixed operating costs. The profit margin you add depends on your specific business goals.
Adding this profit buffer gives you more flexibility in negotiations. Even if a broker negotiates you down slightly, you'll still make money on the load. Without a built-in profit margin, you risk operating at or even below your actual costs.
Regularly reevaluating your profit margin is important. As your fixed and variable costs change over time, adjust your profit margin accordingly. The goal is to maximize profitability without pricing yourself out of competitiveness for loads. With an optimized CPM plus profit rate, you'll be in a better position to earn the income you deserve.
Step 6: Regular Review and Adjust
Your CPM is not set in stone. As costs and business factors change over time, it's crucial to regularly review and adjust your CPM calculation. Here are some tips for ongoing CPM review:
- Review at least quarterly, if not monthly. Set aside time every 1-3 months to re-calculate your CPM from scratch.
- Factor in fuel price changes. Fuel is likely your highest variable cost, so any fluctuations in diesel prices can significantly impact your CPM.
- Account for maintenance cycles. Maintenance costs tend to come in waves rather than consistently month-to-month. Make sure your CPM accommodates upcoming repairs or tire replacements.
- Consider seasonal impacts. Factors like weather or shipping volumes may raise or lower your CPM at different times of year.
- Update fixed costs annually. As you renew insurance, permits, licensing, review how those fixed costs impact your overall CPM.
- Adjust for major business changes. Large changes like adding a truck, hiring a driver, or switching dispatch services warrant a thorough CPM review.
- Compare to industry benchmarks. See how your CPM stacks up against industry averages, which can point to any potential issues.
- Set CPM goals and track trends. Establish CPM targets each quarter or year, then monitor your progress over time.
Regularly reviewing and fine-tuning your cost per mile calculation is crucial for keeping your financial health on track as an owner operator. Don't rely on a single CPM estimate - be diligent about adjustments anytime your costs change.
Conclusion
Knowing your cost per mile gives you the power to make strategic business decisions and negotiate better rates. Calculating your precise CPM allows you to set rates at a profitable level, rather than simply covering costs. With clear data on your true operating expenses, you can confidently decline loads that would fail to deliver a profit margin.
Understanding CPM also enables you to make informed choices that impact your financial health. You can weigh the costs and benefits of upgrading equipment, changing fleets, or expanding services. With your profit target defined, you can pursue strategic moves that boost your bottom line.
Most importantly, tracking CPM ensures the long-term profitability and sustainability of your trucking business. Rather than flying blind, you have keen visibility into what drives your costs. This allows you to keep them in check, while steadily improving your rates. With your finances optimized, you can realize your growth goals in step with your profit goals.
So know your cost per mile. Let it be your guide to strategic decision making, savvy negotiation, and ultimately, profitability. Use it to plan your path to sustainable success in the trucking business.