Developing A Business Plan

Developing a business plan, also known as a pro forma document, is the key step to starting your business on the right foot. A pro forma is a projection of income and expenses that businesses use to predict profitability based on reasonable assumptions about what will happen. The same format can be used for cash-flow analysis and budgeting.

You need a pro forma to show yourself and potential lenders that your business will turn a profit. A pro forma gives you an opportunity – while the business exists only on paper – to make adjustments, such as buying a less expensive truck or getting a hazmat or tanker endorsement so that you can haul higher-paying loads.

Many new owner-operators do not crunch numbers for fear that their estimates will be useless. This is a poor reason to avoid forecasting your finances. If you neglect to make financial projections, you won’t realize that your plan is a money-loser until it’s too late. If you aren’t comfortable with this, have a trucking accountant help you. Have him show you step by step how he did it so you’ll be knowledgeable enough to understand it and keep up with your progress on your own.

If you do your best to make realistic predictions of expenses and revenue and accept that your estimates are just that, you can learn a great deal about how your business will fare in its early months. Even a somewhat inaccurate picture is more helpful than no picture at all.

You need to prepare a pro forma only once a year or whenever your business changes or grows. So after you develop your pro forma, don’t put it in a drawer; use it to monitor your operation and make adjustments.
If you can construct a spreadsheet on a computer, doing a pro forma allows you great flexibility in evaluating changes in your marketplace. For example, you could hold certain values constant and see how various changes in fuel prices could affect your bottom line.

To show you how to make a pro forma, this chapter includes a pro forma for a fictional owner-operator, Joe Trucker. Joe picked a company to lease to after investigating 20 or so and interviewing with five. After careful research and many conversations with experienced owner-operators, Joe decided to buy a good late-model used truck. Here’s how he approached his business plan.

Revenue. His research showed that he could expect to earn $.90 per mile. Joe thought he could expect to run 135,000 miles the first year, grossing $121,500. Next, he reasonably estimated all expenses, beginning with fixed expenses – those that stay the same no matter how many miles he runs.

Truck Payment. With a dealer’s help, Joe decided that he could put down $10,000 and make monthly payments of $1,600.

Licenses And Permits. These are annual expenses when you register your truck in your base state. You can buy your own base plate, or the company you’re leased to may furnish the plate free or buy the plate and charge the cost back to you. Joe plans to buy his own plate so that he won’t be obligated to the company he leases to. It will be an annual one-time cost of about $1,300.

Truck Insurance. This category includes property damage, liability, bobtail, collision, deadhead and other types. Your company provides the public or primary liability. Some companies absorb the cost; some charge it back to you. Also, most companies pay for cargo insurance. Joe’s research shows he can expect to pay about $7,200 a year for all truck-related insurance.

Federal Use Tax. This is an annual tax. New owner-operators have to pay it by the last day of the month after they buy the truck. Because Joe is going to have his truck delivered in early December, the tax will be due by the last day of January. Chapter 14 discusses this tax, also called the heavy-vehicle or 2290 tax, in more detail.

Income Taxes. Sole proprietors estimate their income taxes and pay them in quarterly installments. Joe’s first installment will be due Jan. 15. Future installments would be due April 15, June 15 and Sept. 15.

Work Clothes. This includes boots, coveralls and other such items.

Dues/Subscriptions. Joe will join a trucking association so he can get discounts on legal help, insurance and other services. He also will subscribe to trade magazines so that he can keep up with what goes on in the industry.

Cell Phone. Joe will need this for business purposes, as well as staying in touch with home.

Occupational/Accident Insurance. This protects your income in case of injury or illness. Other forms are disability insurance and worker’s compensation.

Accounting Fees. Joe found a good accountant who is familiar with trucking.

Reserve. Experts recommend having enough to cover two months of truck payments and living expenses. Joe saved enough to have a cushion when he started, so instead of saving 10 percent of his gross revenue, as recommended, Joe settled on 4 percent to 6 percent a month. Later, as his reserves are depleted and he’s earning more, he will start putting aside 10 percent.

After Joe listed fixed expenses, he turned to variable expenses, called “rolling costs” by some owner-operators. The more miles you run, the more fuel you’ll use, the more scale fees you’ll pay, the more tolls you’ll incur, the more oil changes you'll have done, the more truck washes you'll buy, and so on.

Fuel. A good way to project fuel cost is to use 21 percent to 38 percent of projected gross revenue. The variance depends on the cost of fuel, where you run and your fuel efficiency, which is influenced by several things. If you spend a great deal of time in the west, for example, a higher percent. This example assumes Joe gets 6 miles per gallon and that his fuel cost, after receiving the full surcharge from his carrier, is $1.50 a gallon. You might receive little or no surcharge, so be sure to check this out before leasing to a carrier.

Maintenance. Joe knows from his years as a company driver how often to have the oil changed, the truck lubed, belts and hoses replaced, and so on. Based on his expectation of running 135,000 miles, he estimates the expenses for each maintenance item and totals them.

Repairs. Even though Joe’s truck has a substantial warranty left, he knows that it will need repairs in the future, so he’s saving now for the truck's later years.

Tires. This category includes new tires, recaps, repairs, balancing and alignments.

Truck Washes. This expense is often overlooked, but even one wash a month at $50 adds up to $600 a year.

Meals. Joe’s accountant advises him to take the per diem meal deduction for income taxes, which is common. So for planning purposes, Joe budgets what he thinks he’ll spend for meals on the road.

Tolls/Scales. Tolls depend largely on your lanes. A trucker running from Illinois to New York, for example, can pay as much as $200. Keep track even if you run toll roads infrequently, because your lanes could change. Some companies reimburse owner-operators for tolls, but if you’re responsible for them, keep the receipts and have a Tolls category. If you weigh at public scales, the cost are large enough to include in your pro forma.

Lodging. Sometimes an occasional stay in a motel is necessary. Based on the hauls Joe expects to run, he estimates the number of nights per month he’ll stay in a motel.

Postage/Courier. It is important to get freight bills to your carrier quickly, so your settlements aren’t held up. Joe included the cost of a courier service.

Supplies. This category includes miscellaneous items, such as small hand tools, paper towels, gloves and office supplies.

Total Expenses. Add variable expenses and fixed expenses to get this figure. Subtract it from revenue to get net income.

Notice that Joe’s pro forma doesn’t have a salary category. A sole proprietor’s salary – listed in the chart as net income – is what is left over after expenses. It is difficult to assign a fixed number to salary. If one month you have to choose between paying yourself or making your truck payment, the salary would have to go.

After the first year or so, when you have a better handle on your operation, you might choose to list salary as an expense.

Joe projected a good first year, with net earnings of $33,061. That’s better than most owner-operators do in their first year, but by no means out of the question for anyone who does careful planning and watches his costs.

Thinking Long Term

For Joe Trucker to make a five-year projection, he assumes that through careful monitoring of his business and learning more about the owner-operator market, he would increase his revenue and reduce his costs every year.

In his first year, Joe will learn his company's system and lanes. He will learn about cost control and time management. He will learn to keep good records, how to figure his cost per mile and how to use that information to make good decisions.

In his second year, Joe will learn to recognize the most profitable loads, and to run hard in good months and save big for slower times. He will bring his costs further under control.

During his third and fourth years, Joe will improve his time management and get a better handle on his finances. He projects that his truck will have more than 500,000 miles by the end of his fourth year, so he will trade it that year. Because he plans to maintain his reserve fund contributions, he will have a large down payment to accompany his trade-in, so it will not present a serious disruption in his budget.

By his fifth year, Joe's net income will be about average for any owner-operator. He will be well on his way to building a secure financial future for him and his family.