When getting in to fire up for another week on the road, the question often pops into my head of, “How hard do I have to work before I start putting money in my pocket?” This question is actually a very important part of any business, regardless of what industry you are in. The point where revenue turns into profit is known as the break-even point. Figuring out your simple break-even point helps gauge how hard you have to work to turn a profit and is not terribly hard to figure out.
To find this point you will need to know your types of expenses. You may think you know your expenses, but you must look a little deeper than the surface and know the difference between your fixed and variable expenses. Fixed expenses consist of costs that remain constant regardless of whether the wheels are turning or not. Things such as truck/trailer payments and insurances are good examples of this, as they remain the same even if I do not haul a single load within a given period.
Variable expenses consist of costs that typically increase the more you run. Things such as fuel, tires, and maintenance can be included in this category because the more you run the more these things add up.
For ease of explanation I will base this on a driver compensated on a “per mile” basis. The break-even point can now be found by taking the fixed costs and dividing them by the difference between the per-mile compensation and the variable expenses per mile. Represented mathematically it would be:
Break-even point = fixed costs / (compensation per mile – variable cost per mile).
In the above chart, TR=Total Revenue, TC=Total Cost, FC=Fixed
Costs, Quantity=Miles
The result of this equation will give you a number that represents mileage. To be more specific, it gives you the number of miles you have to run before you are out of the “red” and into the “black”. Once this point is reached, your fixed expenses have been satisfied and expenses only cut into your gross revenue from the variable side of expenses for every extra mile you run. This is the reason there is always a lot of “buzz” surrounding ways to better control your variable expenses. So in theory, the sooner break-even is hit, the sooner you actually start to turn a profit. Also, the more you are able to lower your variable expenses, the more profit builds faster past the point of break-even.