Owner Operators - Tax Tips
The Record Keeping Road to Success
In today's challenging business environment, it is more important than ever to keep track of your costs. You need a budget and a system for tracking income and expenses. Knowing your expenses is one of the first steps in determining your minimum operating costs. And you must budget so that you can set aside funds for preventative maintenance, breakdowns, spikes in fuel prices and for a general slow down in business.
You need a record keeping system that will accurately reflect your income and expenses. A record keeping system doesn't have to be complicated. Bookkeeping is nothing more than grouping and summarizing all your income and expenses so that they can reflect, in an orderly manner, how you are doing. It can tell you how much you have collected and how much you have spent by category such as fuel, insurance, repairs, parts, etc. It can tell you if you have been successful and highlights areas where your expenses should be examined. In short, it gets you thinking about your business and what you can do to make it better.
There are various bookkeeping methods available to you. One method is to buy a record book specifically suited to truckers that allows the owner-operator to record their expenses on a daily or monthly basis by type of expense. These books are readily available in truck stops throughout the country. It may be more convenient to record your expenses monthly. You would record your income as it's received. An alternative approach would be to set up separate file folders for each type of expense (for example: fuel, parts, tires, repairs, supplies) and then total them at the end of each month.
Another method to help you record your income and expenses is to make up your own worksheet or use an accountant's pad available in any stationary or office supply store. Simply list each month across the top of your worksheet and your income and expenses down the left side. You can then total your expenses and subtract them from your income to arrive at your net income or profit.
If you are doing your own bookkeeping, we recommend using a computer if possible. There are many good software programs available specifically designed for trucking or you can simply use a spreadsheet program such as Excel. You would gather all the same income and expense information a professional bookkeeper would need and enter that information into your own bookkeeping software program, or spreadsheet, etc. You will have a section for entering your income and a section for entering expenses. You want to make sure to enter your information as regularly as possible.
Once you have all your income and expense information in an organized format, you will be able to review that information to gain more insight into your business operation. Whether you are looking at a professionally prepared Profit & Loss Statement or a self-generated one, you will have the information necessary to start managing cash flow and controlling costs.
Managing cash and controlling costs are important elements to building a successful trucking operation. Today's trucker must use every tool at his or her disposal to ensure they are operating as profitably as possible. One of these tools is the ability to calculate both your revenue per mile and your cost per mile.
To determine cost per mile for your over-all operation you would divide your total cost of operation by the number of miles you ran. This should be calculated monthly and year-to-date to get the most accurate figure. Once you determine your cost per mile to operate your truck, you can use that number to determine when a particular trip or load is profitable. Let's assume your cost per mile is .79 cents.
Next you'll need to know how to calculate your revenue per mile. Take your total revenue (income) and divide by your total miles. This calculation will give you your revenue per mile or in other words how much you make for every mile you run. Let's say your revenue per mile is $1.40. Now that you know both your revenue and cost per mile you can calculate your profit per mile. Take your revenue per mile of $1.40 and subtract your cost per mile of .79 cents. That would tell you your average profit per mile is .55 cents.
With these calculations you can always determine in advance the profitability of a load. Take the total amount a job pays; this is your total revenue. Then divide by the number of miles the trip will take and you will have your revenue per mile. Let's say a load pays $2,500 and the trip is 2,350 miles; the revenue per mile is $1.06. You now know it costs you on average .79 cents per mile to run. If you accept this job you will only make .27 cents per mile, that's less than half of what you need to match your average profit per mile. When doing these calculations be sure you include all the miles traveled including deadhead. If you don't include unpaid miles you won't have an accurate number.
The cost to operate your business is something you want to continually review. The more accurate your expense records, the more successfully you can manage your business. You must be able to project needed revenue vs. expenses. Will you have enough cash flow? Are you within budget? Will you be able to qualify for a loan? Is your cost per mile creeping up each month? Why? The only way to increase your profit is by either cutting costs or increasing revenue, or a little of both. A few cents shaved off your cost per mile can mean a lot if you run 100,000 miles a year.
It is important to be able to identify all your costs in relation to your operation. All business expenses, no matter how small, should be kept track of even though they may not be deductible for tax purposes. For example, for meals on the road you may use the per diem allowance for tax purposes; however, when calculating cost per mile you will need to keep track of your actual meal expenses.
You should break down your costs into three types: fixed, variable and individual variable. Fixed costs stay the same regardless of the miles you run. Examples would be equipment payment, taxes, license, permits, insurance, etc. Variable costs are mostly operating expenses and these will vary month to month. Examples would be fuel, oil, repairs, maintenance, tires, tolls, scales, etc. Individual variable costs differ with each individual operation. In general variable costs apply to most trucking operations where as individual variable costs do not. For example, you may pay driver wages or lumpers and another trucker may not. You may do you own bookkeeping, but your buddy may pay an accountant to do his. Even if you're not entirely sure what category to use, be sure to keep track of every expense.
Now that you know what to do, how do you use it? Aside from using your calculations to determine the profitability of loads, you can also use the numbers to predict future costs, analyze past performance and cost out equipment purchase comparisons. When it comes to being successful you've got to operate smart and use all the tools available to you. Consult your tax advisor for more information.