Analyzing Profitability

The latest episode of McLeod Insights features Jody Farley and Mike Masteller, team members here at McLeod Software. We discussed the importance of analyzing profitability for trucking and logistics companies. Mike and Jody share some useful tips for how you can start analyzing profitability in your own operations.

Where Should Companies Start?

Most companies determine profit based on a “revenue minus expenses equals profit” model, but in the transportation industry, it’s just not that simple.

In trucking and logistics, no two companies operate the same. Despite similarities in routes and freight, business models vary. Therefore, each company looks at profitability in its own way. This opens up a wide range of possibilities, allowing companies to look at profitability based on what’s most important to them.

Some companies will look at customers, order types, or lanes. Others look at revenue codes.

“Your revenue code represents your revenue stream,” Jody says. “You can analyze the revenue and the costs associated with generating that particular revenue code. So that revenue code might be something that represents your terminal – or your business locations across the country.

“It might represent different trailer types, whether you’re hauling van loads, reefer loads. or flatbeds. Your revenue stream might be determined by the type of customer you’re hauling freight for. So any of those are a really good place to start with a high-level picture of your profitability.”

Companies can move into more detailed analysis from there, such as “looking at a particular type of freight within a particular customer, or looking at your lanes and whether or not where you’re hauling your freight makes you profitable,” she says.

Profitability analysis ultimately allows companies to take their actual costs and apply them to a specific revenue code, which is then compared against the revenue stream. Rather than a big-picture overview, it allows companies to get very specific.

Looking at Profitability from a Lane Perspective

Mike says it’s incredibly important for logistics companies to look at their profitability from a lane perspective. On paper, the cost per mile for a trip might look great, but when you break down what it actually involves to get a driver from point A to B and back, those numbers start looking bleak.

“I always push for a round trip perspective,” Mike says. “But the difference there is that if you’re looking at profitability by one lane, or one load, you may [schedule a load to] go from Minnesota to Montana, and you’re going to get to $20 a mile. That’s going to look really great on paper.

“But when you look at it operationally, the backhaul – you only get $1.20 per mile, and you have to deadhead 300 miles to go get it. So that head haul of pay to $20 per mile now looks more like an average of $1.35 or $1.40.”

Jody says companies not only need to look closely at the backhaul, but other factors that impact it. Rates per mile are just one concern.

Analyzing and Trimming Recruiting Costs

Recruiting drivers is another area where costs can add up quickly and negatively impact a company’s profitability. Mike and Jody suggest taking a look at your lanes and noting where your drivers live in contrast.

Keeping your drivers happy is a great way to keep recruiting costs down, because you’ll enjoy a lower turnover rate. One way to keep your drivers happy is to have them pick up and haul freight in areas that are near where they live, so they can get home to their families more often.

Additional Cost Considerations

According to Mike and Jody, there are many other areas where transportation companies can analyze their costs and profits. These include:

  • Tractor profitability
  • Maintenance cost per mile
  • Profitability per customer (rates per customer and per location)
  • Velocity
  • Number of stops
  • Hiring practices
  • Driver retention

If you need assistance analyzing your company’s profitability, our software can help. McLeod Software offers transportation management software solutions for truckload carriers, private fleets, 3PL & brokerage, and LTL. See what we have to offer here.

To hear the full podcast episode featuring Jody Farley and Mike Masteller, click here.