In the last post, we talked about revenue, but revenue is only half of the profit equation. Costs comprise the other half and being a successful business owner means managing costs as well as generating revenue.

Managing costs is important regardless of the state of your business. If you are doing well, cutting costs will increase your ability to save more or invest more in your business growth. If your business is in financial danger, cutting costs is one of the key components in weathering problems and getting back on track.

But before you can start to manage your costs effectively, you must understand the difference between the two general types of costs: fixed and variable.

Fixed Costs

A fixed cost does not change from month to month but instead stays the same regardless of the miles you drive or your efficiency. Generally, they cannot be altered on a short-term basis because of contractual agreements. They are often referred to as a cost of time since they are due on a regular basis such as monthly, quarterly or yearly and are incurred daily regardless of business activity.

The way to determine your fixed costs is to consider the expenses you would have to pay even if you weren't driving your truck. For an owner-operator, these are typically costs such as the truck payment, insurances, base-plating or registration fee and the yearly heavy vehicle use tax. You still have to make these payments whether you drive every day or take a month off and the amounts don't change, at least in the short term.

One of the ways to manage your business successfully is to understand what your daily fixed costs are. If you know what it costs to own your truck each day, you can make sure that you generate enough revenue to offset those costs. Doing a quarterly or yearly review of your fixed costs to ensure they are as low as possible will help your net income. Understanding your daily fixed cost is also an important tool for understanding the amount of revenue you will need to be successful and also for managing your time off.

Variable Costs

Variable costs are those that change based on the distance traveled and are directly related to operating your truck. These costs are driven by the business activity and the miles you run. Think of variable costs as the costs of distance because they change based on the number of miles you drive. The variable costs you incur are what make your truck go down the road.

You won't know the total of your variable costs until you actually start driving although your budget will give you a good idea of what it will be. They include expenses such as fuel, fuel taxes, your per diem, communication, supplies for the truck and maintenance. These costs can be lowered overnight by changing your own habits. The most profitable owner-operators pay attention to their variable costs and minimize them wherever possible.

Next time we'll look at the importance of knowing your cost per mile.