New Article From Old School About Buying Or Leasing A Truck

Topic 20161 | Page 12

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Old School's Comment
member avatar
I've deposited over $70,000 in six months.

Chris, this is the very kind of thing we are always trying to teach people about. You are no longer an employee on somebody's payroll. You are an independent contractor now - you are actually in business for yourself - you are self employed. Therefore the amount of money you are depositing means nothing anymore - that number does not in anyway represent your "net pay." I realize it is labeled as "net pay" on your settlements, but that is why Brett and I get so frustrated when somebody tries to show us these large settlement checks and then represent it as their "net pay." It is very disingenuous to try to use those numbers to represent how well you are doing as an Owner/Op, and very disturbing if you believe that those numbers represent how much money you are making.

I used to deposit millions of dollars during the year in my business - I never dreamed I was making that kind of money. A business person does not measure their net pay by their deposits. I remember sometime back having this discussion with you where I said that I would be interested in seeing your numbers at the end of the year that you shared with the IRS if you used a professional accountant (CPA) to produce your tax return. I also said something to the effect that as far as I'm concerned your numbers are meaningless if you just throw them out there yourself.

You went ahead and threw this out there, and it is obvious now that you don't really understand how the numbers work.

I took a quick glance at your numbers this morning, and it appeared to me that you are making somewhere between $48,000 - $60,000. I would really be interested in hearing what your accountant comes up with at the end of the year. I know you are going to be really surprised if his numbers fall in line with what I just stated, but if they do I hope you will realize that I actually know what I'm talking about. If he thinks you are making a killing, and you owe a bunch of money to the treasury, then please jump in here and toot your horn loud and clear, but I am fairly certain that you are going to be surprised at how close my quick estimate is.

If you're making $140k a year I say that is a rare deal for an company driver and is not the norm.

For the record, I never said that - you did.

Here is what I said...

To me your net pay looks like it is decent but a little less than I am netting as a company driver

The whole problem here is that you don't understand what your "net pay" actually is. I made that statement based on my own quick calculations of your net pay based on the numbers you gave us. Were my calculations wrong? That is certainly possible, I didn't have a whole lot to work from, but I do have a lot of experience in, and knowledge of accounting You will need to pay an accountant to get the real picture, but it is a sad thing to have to pay someone just to find out you weren't doing nearly as well as you thought you were. By the way, you really should have an accountant helping you now, not just at tax time (just my opinion).

It looks like you are doing well, but I just don't think you are doing any better than you were as a company driver. You seem like a smart hard working guy, and I think you are going to get this thing figured out eventually. I understand how getting those big checks makes it seem like you are really doing a lot better, but it just doesn't work that way.

HOS:

Hours Of Service

HOS refers to the logbook hours of service regulations.
Brett Aquila's Comment
member avatar

One thing I always see people do which I strongly disagree with as a strategy is spending their cash unnecessarily. You're talking about paying down credit card debts and paying off your truck quickly and things of that nature. Personally I think that's the wrong approach, especially when you're new to a business.

Cash in the business world is like Oxygen in life. Without it you're dead. Quickly. So do you really want to use your cash to pay for things that can wait? I wouldn't, and in fact I don't. I'm financing things right now that I could pay cash for several times over and I'm happy to do it. I look at the interest as "business insurance" - I pay a small fee to use someone else's money so that I have the security of hanging onto my own.

In today's world where interest rates are at all time record lows that strategy makes more sense than ever.

With every business out there you're going to come across tough times where you're desperately going to need cash to either survive or to adjust to changing times. You'll need to pay for changes to your infrastructure, adjust your business model, or adjust to your competitors and the economy. You can also get sick or injured and be forced out of the truck.

My advice would be hang onto your cash as much as possible. I went to a small business seminar one time and the exact quote from the host was:

Hang onto your cash. In business, cash is king. When you're out of cash, you're out of business.

You may pay a little "business insurance" in interest, but that's a lot better than being short on cash. In fact, pretty much everything is better than being short on cash.

HOS:

Hours Of Service

HOS refers to the logbook hours of service regulations.
Brett Aquila's Comment
member avatar
I used to deposit millions of dollars during the year in my business - I never dreamed I was making that kind of money.

I wish everyone who may be considering going into business for themselves would sit down and write out a 10 page report about that statement right there. Understanding how to estimate your gross profit, net profit, profit margins, and cash flow is critical to evaluating your prospects in any business. Not understanding the difference is by far the #1 reason people get drawn into buying or leasing a truck. They see these weekly settlements and view it the same way they would a paycheck.

I'm not a tax expert but I was a Box Truck Owner Operator for 9 years.

Now that I didn't expect to hear. You have a business history that long, and it includes owning box trucks, and yet you're here posting weekly settlement checks and talking about short term cash in the bank as a metric for success? That's a long time to be in business. It seems to me you should have a rather deep understanding of how success in business is truly measured. Yet, to be honest, you're talking like someone who is brand new to the game. I don't like to insult you but that's just an honest observation. After almost a decade in business I would expect a different type of conversation.

It also begs the question, "What happened to that business?"

Owner Operator:

An owner-operator is a driver who either owns or leases the truck they are driving. A self-employed driver.

Chris L.'s Comment
member avatar

Not trying to mislead here. I didn't talk about my gross before fuel and everything else. That could be misleading for sure.

I'm just showing my experience nothing more.

As far as my change from box trucks. I was burned out on all day city driving, I wanted the open road. Plus I always wanted to drive a big rig.

Let me try one more thing.

My average month was 11,776.25 Take out 1400 truck note, 250 pm service, 500 misc for tire blow out or something. That leaves 9626.25. Of course taxes come out too.

Wouldn't that represent my net for the last 6 months? What's left after my tax rate. Which is still to be determined.

I'm not trying to but heads here but more trying to understand where we differ.

I'm not delusional and think I'm netting double or anything near, but I do feel I'm doing better than I was. By how much I don't know yet.

OWI:

Operating While Intoxicated

Brett Aquila's Comment
member avatar
I'm not delusional and think I'm netting double or anything near, but I do feel I'm doing better than I was. By how much I don't know yet.

See, that's the approach a lot of people take. They dive into running a business and then wait to see how it works out. Trucking has been around for a very long time and little has changed over the years. The numbers are very well known at this point. You shouldn't have to guess about very much at all.

By the way, a really outstanding company driver makes about $65,000 - $70,000 and you said you're netting about $140,000 so you are claiming that you're netting double what a Top Tier company driver would make. But still, no one is calling you delusional.

It is, however, scary to hear people say things like, "I feel like I'm doing better but I don't know." In trucking you should know. You're not sending a man to Mars or inventing a new industry. The economics of this business goes back decades and little has changed. The numbers are easy to know.

See, this is why people like myself and Old School, who have both been successful business owners for a long time, never even started a trucking business. We ran the numbers ahead of time and realized you really aren't going to get anywhere with it. The economics just isn't there over the long run. Sure, you will have good weeks and good months. Heck, the Gods might be on your side and you'll have a good year or two. But in the end you have what's referred to as "mean reversion".

Here's an explanation from an article called Respect the Power of Mean Reversion:

“From financial history and from my own experience, I long ago concluded that regression to the mean is the most powerful law in financial physics: Periods of above-average performance are inevitably followed by below-average returns, and bad times inevitably set the stage for surprisingly good performance.”

– Jason Zwieg

Now this phrase is most commonly used when referring to stock market investing but it applies to trucking, also. What it basically means is that you'll do much better than average for a while, you'll do below average for a while, but in the end you're going to wind up in the same ballpark as your equal competitors. In trucking, the average profit margin after paying the driver is about 3%. So you could take that to mean that the average owner operator can expect to make 3% more than the average company driver.

The trucking industry is a very, very mature industry at this point. There is little in the way of change or innovation, and rarely can a company come up with any sort of real advantage over the rest, other than scale. A tiny percentage of companies have significantly more scale than most. Otherwise, everyone in trucking is:

  • Driving the same trucks
  • Using the same engines
  • Using the same highways
  • Burning the same fuel
  • Hauling the same freight
  • Working for the same customers
  • Running under the same set of laws

Every possible approach to running a trucking business has been done a million times over. Every conceivable strategy is being used by thousands of companies right now. And yet in the end, if you look at the financials, the economics of the business never really changes.

But in the end, understand what Old School and I are saying. We're not saying that you're certainly going to go broke. What we're saying is that you're going to make very little extra money for all of the extra work and risk and commitment you're investing as an owner. You can lose a fortune if things go badly, but no matter how well they go you're never really going to get anywhere owning or leasing one truck. Heck, most people never get anywhere owning or leasing hundreds or sometimes thousands of trucks.

The economics of small scale trucking is very similar to that of family farming. If you dedicate your life to it you can probably scrape up enough money to stay in business but you're never going to get ahead. You're never going to build up any real wealth. You're basically buying yourself a job, and in both industries that job is going to pretty much consume your entire life.

If you're aware of all that and you still choose to go down that path then we wish you all the best. We just don't want unsuspecting people getting lured in by these gigantic weekly settlements thinking they're about to make big money and be the big boss man. It simply isn't going to happen that way at all.

Owner Operator:

An owner-operator is a driver who either owns or leases the truck they are driving. A self-employed driver.

OOS:

When a violation by either a driver or company is confirmed, an out-of-service order removes either the driver or the vehicle from the roadway until the violation is corrected.

Old School's Comment
member avatar

Wouldn't that represent my net for the last 6 months? What's left after my tax rate. Which is still to be determined.

I'm not trying to but heads here but more trying to understand where we differ.

I'm not delusional and think I'm netting double or anything near, but I do feel I'm doing better than I was. By how much I don't know yet.

Chris, I don't get into these conversations to be contentious or argumentative. Nor do I want to come off as arrogant or as if I were smarter than other people. I actually want you and the other drivers that I take the time to help in here to do better than the average driver.

There's one thing I've never heard a business person say: "I want to pay more income taxes than I actually owe." I doubt that you want to pay more than you owe, and if you don't know how to come up with an accurate dollar amount for your income, then you have no accurate way of knowing what you owe. The IRS loves people like you - people who run their business out of their hip pocket. Those are the people who regularly pay more than they should.

I've already stated that you need an accountant. You really also need some professional system of accounting. I would recommend something like Quick Books software, but if you don't get it set up right at the onset of using it then it won't do the calculations correctly. I definitely would encourage you to take a day off and make an appointment with an accountant, preferably one who is somewhat familiar with the trucking business. Ask them how they can help you be able to have an accounting system in place that will help you see where you stand in your business. You need that at a minimum. As it is now, you don't really know where you stand. Running it blind like that will mean you are going to tell the IRS that you made 140,000 dollars this year (kind of like your telling us). Do you really want to pay the tax on that amount if it is true that you really only earned $60,000? Think about that.

You told us that you paid $40,000 for a used truck. You let us know that your note is $1,400 per month. You didn't give us the terms or the length of the truck note, but you did say you had three years left. Is it fair for me to assume you have a 48 month loan? If so, let's just take a look at that part of this whole situation...

48 months @ 1,400 per month = total pay out of $67,200

That means you have an interest expense of $27,200 that needs to be amortized out over the length of that loan. Do you know how to account for that?

It also means that your business has an asset that started out being worth $40,000 (since that is what you paid for it), but is very quickly depreciating down to almost nothing in just a few short years. Do you know how to account for that?

Have you checked with someone like Cornelius to make sure that you are covered properly with insurance? Often times Owner/Operators don't have a clue if they are covered properly through the company that they are leased onto. You really should look into that also.

I just think there are a lot of things that you are missing in your calculations. I used to help people in business understand how to establish their pricing structure. One of the first questions I would ask people who came to me for some help was, "What percentage of your total business does your overhead equal?" 100% of the time they would get that deer in the head light look on their face, as if I were speaking in a foreign language. That to me was one of the most important numbers we had to establish if we were going to calculate how much we needed to be charging for our services or products. Your situation is different from the people I was dealing with because you don't set your prices, but from what I can see, you don't know how much money you are making, and you are way over estimating your net income. I don't want to see you over paying the Tax Man, and if you tell them you are making what you are telling us, then you are going to be out some serious cash unnecessarily. What ever you have to pay an accountant to help you with your book keeping, it will be money well spent.

I used to have a saying about people who ran their businesses out of their hip pockets. I would say that they were stealing from themselves without ever realizing it. If you tell the IRS you are earning 140,000 dollars, they will take your money and never bat an eye. If your accountant says that you only made 60,000 dollars, and can back it up with the proper figures, they won't bat an eye either. I seriously think you are making about sixty grand. Which one of those amounts do you want to base your tax payment on? Don't steal from yourself - get an accountant who can help you work all this stuff out the way it should be done.

HOS:

Hours Of Service

HOS refers to the logbook hours of service regulations.

OWI:

Operating While Intoxicated

Chris L.'s Comment
member avatar

I never claimed to make 140,000 per year net. I gave my numbers for the last six months and clearly stated that I would need to pay taxes and truck expenses out of that amount.

As far as taxes go I used a professional when I was a Box Truck Owner and will go to them again at the end of the year with all my paperwork.

I understand that there will be many deductions or write offs to get my adjusted income to pay taxes on. I been through that for nine years I don't do it myself so I depend on them telling me where I stand and then I will have a game plan for next year. Then I will know how I compare to where I was as a company driver.

I'm only six months in and should have waited to talk about it as all you want is taxable income.

My personal experience so far for me is on top of my living expenses I've managed to pay 15k in debt and put 12k in the bank all in 6 months. Something I couldn't do as a company driver. That means something even if you don't agree.

To be continued in April.

Old School's Comment
member avatar
My personal experience so far for me is on top of my living expenses I've managed to pay 15k in debt and put 12k in the bank all in 6 months. Something I couldn't do as a company driver. That means something even if you don't agree.

Hey Chris, we don't have these interesting (to me at least) discussions just to disagree with people. I always consider them as informative ways to teach people. We may not convince you of anything, even though that's partially why we keep up the conversation with you. We also hope others who read this may get a little glimpse into what we're saying, or maybe a little understanding about the industry, or even just about business in general.

Here's one thing I think would help you considerably. You really need to know how much it is costing you to operate your truck. I promise you that any successful trucking operation knows what their operating costs are and it doesn't matter if they have one truck or ten thousand trucks. You can ask them what is the average cost per mile to operate their trucks and they will be able to give you that number right off the top of their head. They know exactly what it is per unit.

You absolutely need to know your total cost to be able to figure out how to make money at this, and that goes for any business. There is a number that tells you how much it's costing you to operate that truck and it needs to be broken down by the mile. That is how I ran all my estimates when I was formulating a business plan to become an owner/operator. If you don't know that number then you are just running blind and hoping everything will work out somehow.

Imagine if one day you decide to expand your operation and add a few trucks, and hire some drivers. You go in to see a loan officer at the bank and they ask you, " Chris, how do you plan on paying the money back to the bank? What is your strategy for success?" If your reply goes like this, "Well, I've been operating one truck all by myself and I've been able to skim off enough money from my cash flow to pay off 15,000 dollars in credit card debt, and put 12,000 in the bank. I did all this while keeping my living expenses paid. I figure with six trucks on the road I could even do better, at least that is my hope."

Then the bank officer says, "Well son, you seem like an ambitious and eager entrepreneur. Tell me, what has been your cost per mile while running one truck, and what is your estimate on that cost when you add these other drivers and trucks?"

If you give them that "deer in the headlights" look I was talking about earlier, then there is no way you'll be expanding your operation with his money. He knows hope is a failing strategy, and he can't loan money based on it.

When it comes to making money in this business those seemingly large dollar amounts on a settlement check are really irrelevant unless you can know how much they differ from your costs per mile.

I'm not asking you to give me your cost per mile, but I am hoping you'll think about it and try to figure it out. It is going to be way more important for your success than that "net pay" line on those settlement checks.

HOS:

Hours Of Service

HOS refers to the logbook hours of service regulations.
G-Town's Comment
member avatar

Chris,... although unintentional, how is the below statement NOT misleading?

You wrote:

If you're making $140k a year I say that is a rare deal for an company driver and is not the norm. Also I'm home most weekends and some weeks daily

I have read over this thread several times and decided to stay out of it, until now. I just cannot let this go by without calling you on it…

Considering you have only been an O/O for 6-7 months not sure how you came up with that 140k number. At this point it's fiction, perhaps a hope. That said, you are comparing apples to oranges; providing an annual number representing the amount of money your truck might generate (called "revenue") before all of your taxes and costs are deducted. This is NOT what you put in your pocket. Yet use of the word "making" as a qualifier to the 140k number is significantly misleading to the Newbies who frequent this forum. The Trucking Truth mission is to help Newbies, sorry but your above statement isn't in-line with what we stand for.

With all of the free (and valuable) advice Old School and Brett gave you, it seems that you haven't seriously considered any of it and focused primarily on defending yourself. They asked specific questions in an attempt to better educate you, that for whatever reason you chose to sidestep. Like so many drivers who try to support O/O or L/O, you came-up woefully short of a compelling story. However the major difference between you and many others I have read; you seem to be reasonable, not standoffish, and haven't come across like a know-it-all jerk. So for that, thank you.

I am not here to debate or disagree with your chosen path, but attempt to compliment and confirm what Old School and Brett have written, offering my observations as someone with 30 years of experience in enterprise project management and P&L responsibility for several consulting practices. At any given time I knew if we were making money or not and how the actual numbers compared to the "budget". I knew what my fixed costs were and how the variable costs were effected by work effort and throughput. No guessing...a result of effective planning and subject matter expertise. Two things that need to be critically applied to your O/O path.

To me, most of your replies are consistent with an "employee" mentality and not that of a seasoned business owner with over 9 years of experience. "Hope" is not a strategy, yet it seems to be naively factored into your formula for success. In essence a formula for increased risk and potential failure. Brett and Old School think like business owners...nothing is left to chance and everything is well understood factually before making critical decisions or offering "real" numbers. They manage through intellect, experience, careful analysis and definitely NOT emotionally or anecdotally. They already know what to expect before day one of starting any initiative. No different than how you need to approach being an O/O.

My assumption is you do not have a budget, even a simple one because use of that concept escaped all of your replies. A simple, yet realistic budget will help you transition away from the employee mentality to more a business operator mentality. You mentioned an accountant...he can help you build a budget using QuickBooks (or other like tool) and apply the correct tax and depreciation strategies now, not after the fact. If he cannot help with these elements of your business, then he is the wrong accountant for you to include as part of your operation. Forget that he is a friend, you must evaluate his ability to help you run this business without personal attachment or emotion. Meeting with your accountant to reconcile your income statement for the IRS, although necessary, is purely tactical. Solicit experienced professional assistance and input now, not later. Plan on reviewing your budget monthly and make adjustments as you establish accurate and more complete cost figures.

Once you have a budget in place, following it and accurately adjusting it requires discipline, lots of it. Discipline is a must when running a business. You need to establish a reasonable and realistic compensation number to pay yourself (stick to it!) and begin to understand the variable and fixed cost required to run your truck. At this point I think you are still in the infancy of understanding this, begin to focus a lot more attention to this. You are no longer running a "W" tag straight truck but an 80,000 pound money sucking behemoth. Once you establish your cost model, you then you have a much clearer picture of the mileage and freight rates required to cover costs and generate a marginal profit. You cannot just throw money at personal debt or other expenses without reflecting that in your budget and effectively planning for it. Your business must be managed methodically, with factual information and not by the seat of your pants.

My other suggestion (if you haven't already) is to invest time in on OOIDA's website – here is the link OOIDA . There you will have access to resources 100% focused on truck ownership; complete with tools, relevant links, and available experience that can positively impact your approach to this.

Good luck.

DOT:

Department Of Transportation

A department of the federal executive branch responsible for the national highways and for railroad and airline safety. It also manages Amtrak, the national railroad system, and the Coast Guard.

State and Federal DOT Officers are responsible for commercial vehicle enforcement. "The truck police" you could call them.

OOIDA:

Owner-Operator Independent Drivers Association

Who They Are

OOIDA is an international trade association representing the interests of independent owner-operators and professional drivers on all issues that affect truckers. The over 150,000 members of OOIDA are men and women in all 50 states and Canada who collectively own and/or operate more than 240,000 individual heavy-duty trucks and small truck fleets.

Their Mission

The mission of OOIDA is to serve owner-operators, small fleets and professional truckers; to work for a business climate where truckers are treated equally and fairly; to promote highway safety and responsibility among all highway users; and to promote a better business climate and efficiency for all truck operators.

HOS:

Hours Of Service

HOS refers to the logbook hours of service regulations.

OWI:

Operating While Intoxicated

Chris L.'s Comment
member avatar

Oldschool,

That's good advice in your last post and I appreciate that. I will take it to heart.

Thank you.

Gtown,

You are misunderstanding that part you quoted. That was in response to Oldschool saying he nets more than me. In which he thought I was claiming that as my net. I always said it was after fuel, insurance, ect but still had taxes and truck expenses to come out yet.

I do realize I will probably make less in the next 6 months due to weather and holidays.

I'm hoping I can let this be for now as I'm not trying to get banned here. I enjoy the site.

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