Entrepreneurs typically possess a spirit of risk and drive which others do not, and believe me it’s needed with the overwhelming challenges we face pursuing our goals. Owning a business and making a profit is the primary goal of most entrepreneurs. When you decide to buy a truck and be your own boss, you must have these same traits in order to succeed because once you purchase equipment, you’re in for the long haul. You have to make sure your plan is solid and your investments are sound.
Having a plan is essential to becoming successful, and that plan should include your assets, income, debts, and future business outlook. Let’s start with the definition of what an ASSET is - something of value which can be sold. Simple. Since trucks depreciate, their asset value drops over time. Most of the maintenance and repairs put into a truck need to have immediate benefits because they rarely add to the resale value. By immediate benefits, I mean better miles per gallon, or lower operating costs as a result of the type of work being performed on the truck. Upgrades are important but don’t expect the value of the truck to increase because of the amount of upgrades. Trucks depreciate with age and usage. A 5-year-old truck with 100,000 miles on it is still a 5-year-old truck. The mileage on the vehicle may be low, but these trucks were designed to be used not sit around in a parking lot, so you’ll have to consider the truck’s condition. Rubber seals may be dried out, some of the plastic may be cracked, hoses may need to be replaced, etc.
Depreciation is something you can minimize by purchasing a used truck as opposed to a new truck. An old truck can increase your income, but it will decrease your asset value. Through calculation, you’ll have to weigh out which is more valuable. Cash on hand is useful, but new equipment may be more useful. The new California Air Resources Board (CARB) regulations being put into place by the end of this year will require every truck that enters the state of California, to have a Diesel Particulate Filter (DPF) installed unless the trucking company owner meets the requirements detailed on the CARB website. Most owners of old trucks (typically one-truck operations) don’t meet that requirement. If you don’t meet the new regulations and you still want to run in California, it might mean purchasing a new truck. That purchase will likely deplete your cash on hand. If you opt to stay out of California, you can just stay busy elsewhere and build up your cash reserve.
INCOME adds to the assets of your total business value. Having that figure can help you know if you have a profitable business or if you’re headed in the wrong direction. Calculating income is done in two simple steps – determining gross income (everything you bring in) and your net income (everything you bring in minus your expenses). That’s the money that goes in your pocket. Your “take-home” pay as a lot of people refer to it. Many people make a serious mistake when running their own business by only looking at the gross and not doing enough work to understand the net. A new trucker will start out with more expenses than they realize. Expenses such as tolls, oil changes, and regular maintenance can be far greater than what was expected or projected at the start. The basic thing to remember is you’re your net is what’s left over from deducting your expenses your gross. And when I say expenses, I mean ALL of your expenses. Every single dime that’s paid out for anything - health insurance, taxes, truck repairs, meals, supplies, parts, coffee, tires, etc. The list is long. In order to understand what you have to make EACH DAY to cover your expenses, you have to know what they are. You can do this by taking all of your expenses and dividing them by the number of days those expenses cover – whether you do it daily monthly, quarterly, biannually or annually. How much money do you need to make to operate profitably?
When you’re first starting out, obviously you won’t be able to look at your entire year of expenses. And you don’t know what the future will bring. But a way to get some idea is to just take your first two months of expenses and break that down into days. Then you can multiply that daily amount by the rest of the days in the year you plan to run.
Let’s say at the end of your first two months, your total expenses for everything you’ve purchased (fuel, food, parts, etc.) are $20,000.00. Divide that figure by 2 (the number of months) to get your monthly expense figure of $10,000.00. Take that figure and divide it by 4.5 (the average number of weeks in a month). That’ll give you an amount of $2222.22 (your weekly expenses). Divide that number by 7 (the number of days in the week), and you’ll come out with $317.46. That’s your average daily expense. Now you know that you’ll have to bring in over $300.00 a day just to cover expenses, and more than that if you want to turn a profit. That profit, the money you take home, is your net.
You’ve now figured out how to determine your assets and income, but now you’ll have to consider your DEBT. Debts are also expenses, but they can be positive or negative. An example of a negative debt is using a credit card to purchase a meal, not paying the credit card off at the end of the month, and carrying a balance which you’re paying interest charges on. An example of positive debt is taking out a loan to purchase equipment. The loan payment is an expense, but in return there’s an asset which is essential to the operation of your business. The goal isn’t necessarily to have no debt but to limit the negative debt and take advantage of the positive debt. Large companies regularly take on positive debt, which are essentially considered expenses, but they wind up helping the company’s bottom line.
This is a good reason to routinely purchase new equipment. It can improve the asset value of your company and add to the FUTURE of your business. A good position to be in is to have equity in the equipment to such an extent, that you’re able to trade your truck in every three years, keeping relatively low payments. This ensures that new equipment is used and the bottom line in the company is continually maintained. Old equipment has an advantage in that there are usually low or no payments on it, but the tax advantages for a new truck can often outweigh that benefit. Since income is taxed, when your business is very profitable, there should be depreciation taken on new equipment. Used equipment won’t have this same deduction since it’s usually far less expensive to purchase an old truck.
All of these things help determine how much money your business needs to bring in order to turn a profit and succeed. Your next challenge will be to find freight that pays enough for the business to flourish. Now that you have an idea of what it costs to run your business, you also have an idea of what kind of income you need to have. Once the money is coming in and you’re making a profit, the future of your business must be considered. The way you use that profit – whether you save it or spend it – will be determined by the business plan you’ve put in place. This plan (formal or informal) is essential to the operation of any business. Especially one as volatile as trucking.
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