Looking for a tool to analyze your trucking business performance? Let’s look at a simple, yet, underappreciated metric called the Operating Ratio!
What is the Operating Ratio?
The Operating Ratio is used to measure the efficiency and profitability of a business. In other words, it represents the relationship between your total operating expenses and total revenue and indicates how good your business is at keeping your expenses low while creating revenue. A lower Operating Ratio means a smaller portion of revenue is being consumed by operating expenses and a higher Operating Ratio means a larger portion of revenue is being used to cover expenses. Operating Ratio is typically expressed as a percentage.
How do you calculate the Operating Ratio?
The Operating Ratio is calculated by taking your trucking business’ total operating expenses and dividing it by the total revenue generated within a specified time frame. For example, the Operating Ratio could be calculated by month, year, or the lifetime of your business (it would be a good idea to look at all of them!).
Your total operating expenses include all the costs to run your business – both fixed and variable costs. This will include expenses like fuel, insurance, load board software, truck payments, labor, permits, tolls, etc.
Let’s say your monthly operating expenses for the month of October are $18,000 and you generate $20,000 in revenue that month. Your Operating Ratio calculation would go as follows:
$18,000/$20,000 = 0.90
Convert it to a percentage:
0.90 x 100 = 90% Operating Ratio
The same logic will apply to a yearly calculation – just use your yearly expense and revenue totals.
What is a good or bad Operating Ratio?
To decide whether an Operating Ratio is good or bad, we will need to get industry-specific. For example, investors in the railroad industry define a good Operating Ratio in the range of 55-65%, but the trucking industry will generally see higher ratios in the range of 80-100%. Most investors and experts agree that a well-performing trucking business should have an Operating Ratio in the mid-80s or low 90s.
Remember, an Operating Ratio above 100% means that your business is operating at a loss! Your expenses (money going out) exceed your revenue (money coming in). When your Operating Ratio is exactly 100%, you're at breakeven. This is where your expenses (money going out) equal your revenue (money coming in).
A high Operating Ratio often indicates that your trucking business is not operating as efficiently as it could or should be operating. It can also indicate that you are over-resourced with things like inventory, labor, or equipment, for example, or that you're not as calculated or as disciplined with pricing as you need to be.
Why should you pay attention to the Operating Ratio?
As mentioned, the Operating Ratio is a tool used by business owners, managers, and investors to gauge the efficiency and profitability of a business and is commonly used to compare one business to another. Trucking business owners will also find value in utilizing this simple calculation! The Operating Ratio is a tool that can be used to assess the financial health of your trucking business which will ultimately help you make informed decisions about your pricing strategy and cost management. If your Operating Ratio is moving closer to 100%, you may want to consider lowering your costs or charging your customers more for your services. All business owners should use this simple tool to their advantage to improve the financial performance of their business.
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Soshaul Logistics LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. It is meant to serve as a guide and information only and Soshaul Logistics, LLC does not assume responsibility for any omissions, errors, or ambiguity contained herein. Contents may not be relied upon as a substitute for the FMCSA's published regulations. You should consult your own tax, legal and accounting advisors before engaging in any transaction or operation.