A trucking company, like any business venture, faces the risk of failure. However, with some foresight and careful strategic planning, trucking company owners can put systems in place to reduce the likelihood of their business going under. How you ask? Read on to find out!
Why do trucking companies fail? Trucking companies fail when insufficient attention is paid to variable costs, i.e., costs that cannot be easily predicted, yet ones that need to be accounted for. A careful understanding of the different kinds of fixed and variable costs that are involved in running a trucking company, therefore, is central to avoiding failure.
While this might be a seemingly simple answer, diving into the different kinds of fixed and variable costs in a trucking company requires great attention to detail. What are these costs, and how can we understand the role that they might play in a company’s success or failure?
The Costs that Cause Trucking Companies to Fail
Trucking companies constitute a significant industry in the United States (US) with there being over “500,000 trucking companies”, “15.5 million trucks on the road”, and where “80% of these trucking companies are regarded as small businesses totaling 6 trucks or less”. This sector employs an “estimated 8.9 million people employed in trucking-related jobs”, with the United States economy depending on trucks to “deliver nearly 70 percent of all freight transported annually in the U.S”. (Source: US Special Delivery)
Given the significance of the trucking industry in the US, it is important to understand how and why trucking companies succeed/fail in the context of the domestic economy. And in attempting to understand this, we see an immediate connection between the company’s success/failure and its ability to both predict and address the various costs that might be incurred through this business.
Fixed and variable costs – and an insufficient understanding of them — leads to the failure of trucking companies. The fixed costs include aspects like an investment in infrastructure, salaries, and vehicle insurance. The variable costs range from fuel prices and maintenance expenses to changing regulations and indirect driver costs; from routing and planning costs to customer satisfaction and business management costs.
Fixed Costs
Fixed costs are those that do not change over time, i.e., these are the costs that can be estimated, on a consistent basis, based on information that is available in the present moment. While such costs might increase incrementally over time, by and large, they can be calculated at the outset and provide the trucking company with a baseline of the financial investment that might be needed.
Some of the fixed costs involved in trucking are:
- The truck(s) & other equipment
- Vehicle insurance
- Salaries & benefits
- This includes the drivers, accountants, legal team, sales team, media/publicity team, and any other full-time staff members that the trucking company needs — both to keep current business and to invite prospective clients
- Benefits (like health insurance), which companies will have to consider providing in order to hire and retain a qualified staff
Running a successful trucking company will first involve making an extensive and accurate list of the fixed costs that need to be considered.
Variable Costs
While fixed costs can be calculated with some certainty, variable costs are – as the name suggests – less certain. Variable costs depend on a range of influencing factors (as described below), and the trucking company will need to spend a lot of time and attention in anticipating (and addressing) these expenses.
What are the variable costs that are specific to trucking companies?
- Fuel prices
- Fuel prices change based on a complex interaction between geographical factors (like where the fuel comes from and goes to) and political conditions (the relationships between the nations that the fuel is being transported between).
- Trucking companies need to keep a finger on the pulse of such geo-political interactions and account for how shifts in these macro conditions might affect the cost of running the company.
- For example: does it look likely that US-Iran relationships will worsen in 2019? And if so, how might this worsening relationship impact the cost of fuel in the States?
- Repair & Maintenance
- Just like fuel prices, the costs of repairing and maintaining trucks are also less predictable, and anything — from changes in weather to drivers’ personal well-being — can affect how vehicles can be damaged and how often these damages are likely to occur.
- A forward-looking trucking company will not only factor in the expected costs of maintenance and repair (like wear and tear to tires) but also keep in mind contingency factors that might emerge (accounting for the number of trips that might need to be made to earthquake prone areas, for example).
- Changing regulations
- If state or national regulations change, what would the trucking company need to invest in order to address a change in codes of compliance?
- Does the company have enough of a financial buffer in place to mitigate such a change in circumstance — for example, if all the vehicles in the company were to need a particular technological upgrade so as to comply with new regulations?
- Routing and planning costs
- What are the tools – both in terms of additional technological equipment and additional human resources – that the company might need to purchase/invest in, in order to ensure that the most efficient routes are being chosen for the company’s deliveries?
- As navigation and mapping technologies continue to develop, for example, might the trucking company need to hire consultants that come in and train the company’s staff members on how to use these new tools efficiently?
- Based on the routes that are planned, and based on current and prospective business that the company has on its client list, what might be the additional costs incurred as tolls, permits, local licenses, and other such fees?
- Customer satisfaction costs
- What are the costs that might come into play if/when customers need to be reimbursed for delayed or damaged shipments?
- How will the company invest in retaining its clients, in the case of disputes?
- Are there publicity campaigns that might need to be undertaken, in response to emerging disputes, to ensure the company’s good standing within its customer base?
- Indirect driver costs:
- How much might need to be spent on drivers’ food and lodging while they are on the road?
- How do these costs change based on the individual driver and on the nature of the routes themselves?
- Do particular routes end up being more expensive than others, based on the cost of living shifts in different areas of the country?
- What are other unanticipated costs that might arise for drivers while they are on the road?
- Business management costs
- Is there likely to be a need to hire independent contractors/additional staff members based on prospective clients that request the services of the company?
- What if there might be unanticipated costs in reaching new markets and clients?
- Based on the nature of the office space and its ownership status, what happens if the costs increase significantly?
Trucking companies that stand the test of time will be ones that not only have an extensive understanding of fixed costs, they will also be able to have an informed understanding of the variable costs that they might be looking at. So, if you’re thinking of starting your own trucking company, make sure you stay ahead of the curve and get a plan in place for the things you cannot predict.