OWNER-OPERATORS. Trucking Is Their Business

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Valerie Byrd
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1 OWNER-OPERATORS 2016 Trucking Is Their Business

2 OWNER-OPERATORS 2016 WHAT IT TAKES FOR A TRUCK DRIVER TO SUCCEED AS AN INDEPENDENT OPERATOR This paper examines some common challenges for: The company driver making the transition to owner-operator The owner-operator leasing their truck to a company The independent, wellestablished owneroperator building success It takes guts, smarts and hard work to create a successful business. Just ask any truck driver who decided to become an owner-operator. In addition to finding customers and delivering goods on time, the owneroperator must be a savvy negotiator, have a solid knowledge of bookkeeping, excel in customer service and problem-solve on the fly. They must find reliable and trustworthy vendors for the tasks that they can t do themselves. And they need to do all of this on a consistent basis to stay competitive. That s true for the driver content to be a one-truck operation as well as the driver who dreams of heading up his own fleet. It s true whether the driver is just starting out or is a veteran owner-operator with a solid reputation. It s true for the trucker lining up his own customers and the one who chooses to lease to a larger trucking company. The perks of independence go hand-in-hand with the ability to be self-reliant and adaptable. The owner-operators who succeed never stop learning, always look for ways to improve. The casual observer may look at the man or woman at the wheel of a big rig and see a truck driver. But the skills each one has developed make them as serious a businessperson as the suit-wearing executive in a high-rise office.

3 A QUICK OWNER-OPERATOR PROFILE They average 55 years old, with 26 years in the trucking business, and 18 years as an owneroperator The average age for starting as an owneroperator is 37 years old They run an average of 101,000 miles a year THE MAJORITY OF OWNER-OPERATORS LEASE ON TO LARGER CARRIERS AND OPERATE UNDER THE CARRIER S DOT NUMBER Source: According to the Owner-Operator Independent Driver Association, 350,000 owner-operators about 10% of truck drivers are registered in the United States 95% run solo 86% have completed high school, and 45% have some level of college education Most own 1 truck and 1 trailer

4 MAKING THE TRANSITION FROM COMPANY DRIVER TO OWNER-OPERATOR Once a driver prepares to buy a truck and be his own boss, it doesn t take long for the realization to hit. He will be responsible for taking care of everything maintenance and repairs, safety compliance, permits, route planning, financing and more. If he s not properly prepared, he may find himself dealing with an unexpected event that throws off his business plan. And there must be a business plan. Tim Brady, trucking business coach and answer guy for the website TruckersU.com points to the Small Business Administration statistic that 90 percent of people who start any type of business without a business plan will go out of business within two years. So he encourages truckers who are about to strike out on their own to take the time to think through exactly how they will earn money, what their expenses will be, how much of an emergency financial cushion they need for downtime and how much they need to make to turn a profit. Better to realize your mistakes on paper than to make them on the road, where it will cost you money, he warns. The key part of that plan: Figuring out the freight you will haul or the region you will drive that offers steady work. That means staking out those areas that are under-served and stepping in to fill the gap. Ideally, a driver will find a direct customer for part of their revenue, ensuring some level of consistency. But regular work can also come by establishing a good relationship with a broker. With one or both of those freight sources set, an owner-operator can use the load boards strategically to earn money on the way to where they need to go when they need to get there. One of the biggest problems new owner-operators have is using a shotgun method of finding freight through the load boards, says Brady. Using load boards exclusively means lower revenue, because those are the loads that the bigger carriers don t want. Either the shipper doesn t want to pay enough, or it s difficult to handle freight, or it has a long delivery spread and there s a lot of freight like that. One of the biggest problems new owner-operators have is using a shotgun method of finding freight through the load boards, says Brady. Using load boards exclusively means lower revenue, because those are the loads that the bigger carriers don t want. Either the shipper doesn t want to pay enough, or it s difficult to handle freight, or it has a long delivery spread and there s a lot of freight like that. Tim Brady

5 Brady has counseled many owner-operators on how to incorporate that kind of freight into their runs so that it will be profitable. That requires an honest accounting of the driver s break-even point, taking into account fixed costs, which must be paid even when the truck is parked (truck payment, insurance, etc.), constant variable costs, which come up when the truck is on the go (fuel, maintenance, meals, repairs, etc.) and load-specific costs, like lumper fees or trip permits. He notes that any owner-operator must set a salary for themselves as a fixed cost of doing business. Once the driver knows how much they need to keep themselves financially afloat, they can negotiate fees from a position of strength. By getting out of the habit of thinking about rate per mile and understanding how much they need to earn per day, they can accurately assess their profit for each potential job. OWNER-OPERATOR CHOOSING TO LEASE THEIR TRUCK TO A COMPANY When it comes to the details, the owner-operator needs to discuss the company s policies and expectations. Some of the key questions that should be covered: What kind of pay can the driver expect? Is pay determined by mile or percentage of load? How many miles per week can the driver expect to log? How many per year? Does the company or the driver handle tolls, truck washes, scales etc.? If there is a family emergency, will the company get the driver back home? Is the driver expected to load or unload? Most owner-operators lease on to large carriers and operate under the carrier s DOT number. The carrier finds the loads so the driver takes on less risk than she would on her own but has also more leeway in choosing which loads to take and in making her own schedule than she would as a company driver. A leased owner-operator is responsible for all expenses related to their truck, and most companies have specific requirements about the age and condition of the truck. The company may offer insurance, or have a repair shop on-site, but the driver is not obligated to buy any services or equipment from them. It s important for the driver to thoroughly understand the lease agreement they sign, since it is a legal contract. Experts advise taking the time to read the entire agreement and get help from a reliable third party to explain any part that is not clear. Larger companies often provide fuel cards for their drivers, though the driver is still responsible for the cost of the fuel. The cards can offer savings, but some companies may not pass along their fuel discounts to leased owner-operators. Some charge the driver a fee for the card. Those practices can lead an owneroperator to consider getting their own fuel card. My first thought when I get a call from a leased owner-operator is about timing. With their own card, they will probably need to pay sooner than they did with the company, says Christine Jennings, sales executive at WEX Fleet One. We bill the fleets weekly, and aren t billing drivers any differently, but they benefit from the fleet s lag time in reconciling their records, so an owner-

6 operator may have a two-week float on fuel purchases. With their own card, they will pay weekly but they will also get the fuel discount. Since some companies put limits on the type of items that their fuel card can be used for, a leased operator may also find it more convenient to have a card that does not have those company limits. Their own card can be used at a wide variety of truck stops for many of the items they need on the road. CONTINUING SUCCESS FOR INDEPENDENT, WELL-ESTABLISHED OWNER-OPERATORS The owner-operators who choose to strike out on their own, rather than lease their truck to a company, take bigger risks for bigger rewards higher pay and greater independence. The men and women who succeed in this area for any length of time have mastered the business side of trucking, but they may also be slow to change or learn new approaches to the job that might increase their profits. A lot of longtime owner-operators who are successful are happy to stick with what they know. They may be afraid of factoring because of a past bad experience. They probably realize that they pay more for diesel using their credit card than they would with a fuel card, but they don t mind because they are building up air miles for a future vacation. They might have had a fuel card as a company driver, but they haven t looked at them from an owneroperator perspective. So, she points out, not only are they paying five to ten cents a gallon more for diesel with their credit card, but they are missing out on reporting features that can save time, such as a fuel tax report sorted by state, and by truck if they have someone else working for them. It s far easier to retrieve records electronically than from a shoebox. And as far as factoring goes, it not only helps with cash flow, but a factor can help vet potential customers for financial stability. Brady also sees the reluctance to change among veteran drivers. They think, This is how I ve always done it and it s working for me, Brady says. The biggest thing I see is that people operating a business with one to five trucks get stuck in the paradigm of what they earn per mile. They get a number in their head of what they need to earn per mile when they really need to look at time, because if you sit for a day waiting for a load and insist you won t move for less than $2 a mile, your cost per mile will increase with every day you sit. Sometimes you need to take the cheap load a short distance to get to a place where you can get a better load.

7 TIME VS. MILES: TIMOTHY BRADY S FORMULA FOR DETERMINING A PROPER RATE Take an average one-truck owner-operator who pays himself $40,000 a year salary to start Figure $300 a day in fixed costs. This includes all the bills that must be paid whether the truck is moving or parked: salary truck payments insurance phone federal highway use tax base plate Say the truck has a few years on it and rolling costs come to 50 cents a mile (maintenance, tires and fuel - based on diesel at $1.80 per gallon) If a driver sits for one day waiting for a load that meets their self-imposed minimum rate of $2 per mile, they are $300 out of pocket right off the bat. They really need to consider the likelihood, if they are in an area with a low load to truck ratio, that they will be able to get their rate the next day. Each day the truck sits, the cost per mile goes up by 25 to 50 cents. They can t turn off that faucet of $300 a day. Sometimes the better choice is to take a short distance load at a cheaper rate, or deadhead to an area with a better load to truck ratio. That means: 1 mile in 1 day = $300.50/mi. 100 miles in 1 day = $3.50/mi. 600 miles in 1 day = $1.20/mi. Sometimes you have to maximize your revenue, says Brady. And sometimes that means not making a profit, but breaking even. Tim Brady

8 FACTORING AND OTHER BUSINESS TOOLS It s common for an owner-operator setting up their own business to struggle with cash flow issues in the first few years. The lag time between bills getting sent out and payment coming in, as well as unforeseen expenses, can make for irregular income. Some will dip into personal savings until revenue starts streaming in steadily, while others will borrow from friends or family. But many turn to factoring, selling their accounts receivable to so that they can get invoices paid immediately. The time to think about factoring is before the cash stops flowing. As with any other aspect of the business, the owner-operator needs to do their research and ask a lot of questions before they sign up with a factor. One of the biggest is who will take the loss for a bill that goes unpaid. In recourse factoring, the owner-operator accepts the risk, and in non-recourse factoring, which comes with a higher fee, the factor takes that risk. Owner-operators usually turn to a factor during business-building periods. That may happen at the launch of the business, or when there s an opportunity for growth. The ultimate goal though, is for the partnership to be a temporary one, ending when the owner-operator s business is self-capitalized. If the relationship is a good one, there may be times when the owner-operator returns to get through an unpredictable business period. Across the spectrum, the working relationships that an owner-operator develops over time can make a huge impact on their ability to stay afloat. They may look to a savvy accountant with trucking expertise when preparing to pay taxes. They can work closely with a broker to develop a profitable freight lane. A productive working relationship with a direct freight customer can lead to more business. Some owner-operators will always consider themselves drivers first. But whether they spend decades behind the wheel of a truck bearing their name, dream of hiring others to drive so that they can settle in behind a desk and direct operations, or lease their truck to a big company, they have taken on the role of business owner. As one trucking blogger who advises drivers considering the move put it: Being a truck driver is hard. Being an owner-operator is harder.

9 SPONSORED BY: WEX Inc. wexinc.com

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