Operating a business in the trucking industry has always been a challenge, but recent years have been exceptionally difficult. Fuel costs, labor costs, and equipment costs are all sky-high. This environment has created opportunities for some with significant consolidation among trucking companies. Yet household names in the industry that existed for nearly 100 years have completely gone out of business. Given this, how can a trucking business or even an owner-operator hope to make it? The answer lies in improving your trucking company’s profit margins.
What Are Common Profit Margins in the Trucking Industry?
As in most other industries, there’s no standard profit margin that exists in trucking. However, most trucking companies see their margins fall somewhere between 2.5% to just over 8%. Profit margins aren’t always what they seem, however.
In a report on the fundamentals of risk, Rapid Ratings explored how Yellow Corps’ margins looked at the time it went out of business in 2023. According to the report:
“Although the operating profit margin was a modest 3.5%, the net profit margin was a concerning (0.1%), indicating that the company’s operations were barely generating any net profit.”
Therein lies part of the problem. There are different types of profit.
A company’s operating profit is the revenue it generates before the deduction of interest and taxes, but after other operating expenses have already been accounted for (such as fuel costs, equipment, etc.). This type of profit focuses solely on the profits generated from the business’s primary activities.
Conversely, net profit is what we consider the true bottom line for how much a company is earning. Once all other fixed costs and variable costs have been accounted for, the amount that a company has left is its net profit.
In the case of Yellow Corp., had its net profit been 3.5%, it would have been considered a healthy company. But it wasn’t. The company was sitting on a tremendous pile of over $2.5 billion in debt with $2.15 billion in assets. Its debt-to-income and total debts total assets ratios were too high. It couldn’t sustain a business that way.
It’s not always about your profit margin: You need to have a good handle on your cash flow and just how much of that cash you’re able to keep after everything has been paid for, including and especially after payroll, debts, and taxes.
What Factors Impact Profits for Trucking Companies?
The simplest way to understand your net profit margin is that it’s the difference between your revenue and your costs. If you subtract all of the money that your business takes in and subtract all of the costs to run your business, the amount you have left is considered your net profit.
Of course, many different pieces of the puzzle come together to create a net profit. When running a business, you’re goal is to try to ethically maximize your trucking company’s profit margins by saving on outgoing expenses whenever and wherever you can.
For example, let’s say that you’re an owner-operator. You’re considered a small business, so your operating costs primarily fall on you (unless you have contractual agreements that say otherwise). That means many of these will be out-of-pocket expenses that can include but are not limited to:
- Fuel Costs
- Tolls and weigh station fees
- Vehicle maintenance and repairs
- Truck financing
- Insurance
- Licenses and permitting
- Health insurance
- Technology
- Taxes
That easily starts to add up. It’s no wonder 35% of owner-operators reported thinking about leaving the industry in a FreightWaves Research survey.
And of course, these only account for the expenses for an owner-operator. Fleet owners who hire truck drivers also need to consider the employment-related costs that impact profits, as well, such as:
- Cost-per-mile for hired truckers
- Other wages and salaries
- Driver benefits
- Recruitment and retention
- Marketing
- Safety programs and driver training
- Legal costs
- Employment taxes
Just trying to stay compliant with the FMCSA carries costs, as various rules and regulations exist for owners that impact your plan to make your trucking business profitable. Take Hours of Service rules, which have truncated the long distances that drivers used to handle by reducing the time in which drivers are allowed to be on the road. These rules have changed over the years, but their impact on profitability is significant as long-haul drivers spend less time on the road, ultimately reducing the company’s ability to make money from each truckload.
The FMCSA has loosened some of these rules, but your fleet can only handle so much idling at truck stops. Nevertheless, that’s going to be something that every trucking provider needs to consider. Costs are not always immediately straightforward, which means that increasing profits is also not as simple as navigating fuel prices.
Track Metrics to Improve Profits
There’s no one way to improve trucking company profit margins. The “secret”, so to speak, is to implement technology that helps you track various different metrics of the business directly related to your costs, while also finding ways to increase your revenue.
8 Ways Trucking Company Owners Can Improve Profits
Here are a few of the bigger areas to consider to improve your profits:
1. Adopt Real-Time Tracking Technologies
Although your drivers may dislike this level of monitoring, real-time tracking technologies can significantly improve operational efficiency. This technology helps in optimizing routes, reducing fuel consumption, and ensuring timely deliveries, directly impacting your bottom line.
These tools are typically GPS-enabled and downloadable as mobile apps or, depending on manufacturer, devices that hook into each truck’s OBD-II port.
2. Optimize Fuel Management
According to Mohammad Ismail, an Assistant Manager of Road Transport Operations at Tristar Transport, you can expect your fuel costs to easily take up 25% to 30% of your outgoing cash. That makes fuel one of your biggest expenses, second only to driver wages (which can account for 30% to 35%).
Utilizing fuel management software can help identify the most economical fueling stations and plan routes that minimize fuel consumption, leading to substantial fuel savings. You may also want to investigate partnerships or fuel card programs. Many energy companies offer these programs and discounts as a way to generate guaranteed and steady business from fuel consumers.
3. Leverage Freight Factoring Services Correctly
Cash flow is critical in the trucking business. Freight factoring allows you to turn unpaid invoices into immediate cash, improving liquidity and enabling you to cover operational expenses without delay. Choosing the right factoring company is crucial to get the best terms and rates.
Note that because you’re paying a fee to the factoring service, you get less money for each invoice. This becomes an added cost and can eat into your profit margin, so you should use this improvement in your cash flow correctly to help increase revenue-generating opportunities and add more business. Otherwise, all you’re doing is paying a premium to access your cash faster.
4. Enhance Load Planning with Load Boards
Utilizing load boards effectively can help find more profitable loads and reduce empty miles. This is especially true for specialized segments like flatbed hauling where matching with the right load can significantly increase revenue.
As with factoring services, load boards often come at a cost. Most charge fees on a subscription basis, per transaction fees, or implement a pay-per-use model. While there are free load boards available, you shouldn’t count on good quality or good service on these boards.
Before you decide to start utilizing load boards like DAT One and Direct Freight Services, make sure that you have the proper driver capacity to make such a service useful to your business. Overcommitment in accepting loads can lead to penalties and reputational damage.
5. Streamline Supply Chain Operations
As a vital link in the supply chain, motor carriers have the opportunity to improve efficiency through better logistics planning and coordination. This includes everything from load scheduling to real-time communication with clients, reducing delays and improving service quality.
When you invest in the right technology and implement better operations, you’ll develop the reputation you need to get more direct requests for your services. Not all businesses are looking to minimize costs. Often, they want to work with a trucking company that gets loads to their requested destination more efficiently.
If you can stand out of the crowd by being a more efficient operation, you’ll increase your profit margins naturally by increasing demand for your business.
6. Invest in Driver Training and Retention
As The New York Times reported, there’s still a “long road to driverless trucks.” Until someone perfects that technology, you’ll still need to invest in training and retaining drivers. The demand for skilled drivers isn’t going anywhere fast, and every company is fighting tooth and nail to make sure they have the drivers they need to maintain and grow their businesses.
Motivated drivers are the backbone of any trucking company. Investing in regular training and creating a positive work environment can improve retention rates, reduce recruitment costs, and enhance operational efficiency.
7. Focus on Niche Markets
Specializing in niche markets, such as flatbed, hazmat, or refrigerated transport, can allow you to command higher rates due to the specialized nature of the services. Understanding the specific needs of these markets and tailoring your services accordingly can lead to increased revenue.
That said, don’t step into these markets if you’re not ready. Do your research, plan accordingly, and don’t expect an immediate return on investment.
8. Diversify Income Streams
Look beyond traditional trucking services to diversify your income. This could include offering warehousing, logistics consulting, or maintenance services for other trucking companies. Diversification can provide stability and increase overall profits.
By focusing on these areas and continuously seeking innovative ways to reduce costs and increase revenue, trucking company owners can significantly improve their profit margins. The key is to embrace technology, optimize operations, and stay adaptable to the ever-changing landscape of the trucking industry.
There’s No Replacement for Better Accounting Practices
None of these changes will amount to anything if you aren’t properly tracking your expenses to begin with. If you change your trucking accounting practices in a way that leads to a better, more informed view of your cash flow, you give yourself the information needed to increase your profit margin. Generating more revenue and increasing your profit margin starts with collecting intel on your business’s cash and then making changes that ensure your cash flow is consistently green instead of red.
If you’re interested in learning how a Virtual CFO can help track the most impactful metrics for your company’s profitability, don’t hesitate to reach out. Learn more about our Virtual CFO Services for transportation and logistics companies.
