No-Fuss Budgets

When you can look out your office window and see five idle trucks against the back fence, it’s hard to fathom that you’d be better off keeping them there when someone calls and offers to put those trucks to work. Even though the rate would be a little on the low side, if the wheels aren’t turnin’, you ain’t earnin’.

At least that’s what they say. Trouble is, there’s a big difference between earning revenue and earning profit. Your out-of-the-blue-sky client may be able to put your trucks back on the highway, but at what cost?

The place to find answers is your budget. A budget is about more than tracking money: it’s a systematic method of allocating financial, physical, and human resources to achieve strategic goals. A budget helps you monitor progress toward those goals, helps control spending, and predicts cash flow and profit.

There’s a strong need for a “real-world” approach to providing meaningful, flexible budgets for trucking companies, using modern management techniques like “process mapping” and activity-based costing (ABC).

Those are technical concepts, but you don’t have to be a heavy-hitter CMA to understand them.

“Process mapping” really is a fancy term for identifying key operating groups in your company and then examining how costs are incurred within those areas. Typically, we’re talking about aspects of your business that occur within four distinct divisions-the ones that would appear as accounting designations on your income statement: the operations, accounting, administration, and sales departments. Within those four categories are what we’ll call “resource centres”-activities within each department that generate costs or revenue.

Here’s where activity-based costing comes in. ABC links costs not only to a department, but to critical jobs each department performs. Under “Operations,” for example, you’d find the resource centre, “Vehicles,” and under it, the activity, “Transport Loads.”

Process mapping and ABC are the first steps toward turning your budget into a useful management tool. They connect the numbers in the ledger to what’s going on in the trenches at your trucking company.


The first job is to identify the resource centres within your operation. This transforms the Operations, Accounting, Sales, and General & Administrative accounting designations from a pro forma income statement like the one on page 51 to a format you can use for ABC.

For instance, for this article, the resource centres under “Operating Costs” are Vehicles, Dispatch, Safety, Risk Control, and Maintenance. These-and the resource centres for the other accounting designations, are detailed on the charts on pages 52 and 53.

Next, classify the activities to be performed in each of the resource centres and define “cost-drivers” to put the numbers into context. Costs drivers should be factors causing the number of miles turned, the number of loads hauled, or the percentage of revenue created.

Now you’re ready to analyze just what happens on a day-to-day level in each resource centre in order to establish what resources each centre really needs.

For example, in the billing department, let’s assume that one employee can process 400 invoices per week, and the company bills between 520 and 600 invoices per week, or an average of 560. Normal demand would require 1.4 billing clerks (divide 560 by 400). Assuming that 1.67 billing clerks were available to work, you’d have an excess capacity of .27 clerks, or roughly 15% over the requirement.

Whether you’re looking at truck drivers or dispatchers or sales staff or accountants, you can break down the activities of the other resource centres in the same way to determine the total requirements under normal demand.


When you’re assigning costs to each resource centre and its various activities, certain expenses are directly related to the jobs performed. However, general supervision and management costs must be assigned to the resource centres, too. Assume that the controller devotes 25% of his time and effort to billing, payroll, and accounts payable. Twenty-five percent of his associated costs, then, should be divided evenly among each of these resource centres. The same procedure would apply to any employee who splits time among more than one resource centre. Make sure the assignment of these costs is developed from factual data, and not arbitrarily allocated.


Once you’ve defined your resource centres and their related activities, and assigned costs to them, it’s time to address the efficiency and use of these resources. Look at two areas: excess capacity, and non-value-added capacity.

Excess capacity is defined as available resources that aren’t required to do business. If you have 100 trucks and five are sitting because you don’t have enough business, you have excess capacity-5%-in your “Vehicles” resource centre under the “Transport Loads” activity.

Non-value-added capacity results from jobs that don’t create added value to customers. These excessive costs are generally borne by the company-they can’t be passed on to customers. As a result, profit deteriorates. For example, the compliance clerk who has to manually verify the accuracy of an automated logbook checker is creating excessive costs for the “Safety” resource centre. How much is excessive cost relative to the overall activity costs? Arriving at an accurate percentage requires as much historical data as you can muster, but also a gut feel for the job, the people doing it, and the tools they have to work with.


Now you have enough information to go forth with an ABC format (see the chart on page 52). Actual costs have been assigned to various resource centres, so now develop your cost-drivers to put those costs into a context you can work with.

For instance, we’ve assigned vehicle cost by the cost-driver “Miles Operated” as shown on page 53 under the activity, “Transport Loads.” This way you can express costs on a cost-per-mile basis. “Loads Hauled” and “Percentage of Revenue” are also common cost-drivers, but you can refine or create your own depending on the complexity of your operation, the extent that greater reliability may be achieved, and the ability to isolate and properly apply these cost-drivers.

The top chart on page 53 brings forward the costs assigned to the individual resource centres and identifies the activities within each centre in the chart on page 52. These costs are identified as Operating Costs-actual historical costs that were originally recorded in the chart of accounts by department, then reassigned to the resource centres. There has been no adjustment at this time for excess capacity or non-value-added activities or capacities.

“Miles Operated” was used as the cost-driver for Transport Loads, DOT Compliance, Maintain Equipment, and Pay Employees and Pay Vendors. “Loads Hauled” was applied to the activities of Assign Loads, Bill Customer, and Obtain Loads.

“Percentage of Revenue” was the cost-driver for assigning costs related to Insurance, Licensing, and Permits.

These cost-drivers were used for simplicity: you could use several cost-drivers within a resource centre. By applying cost-drivers to the costs assigned to the various activities, we develop a rate applicable to each activity, the sum of which is noted in the column, “Flexible Budget Rates.” These rates may be used to assign costs to cost objects such as a truck, a driver, a customer, or a traffic lane. After the costs are assigned, you can determine the profitability of the cost object.

These results reflect actual costs and don’t reflect the competitive pressures that apply when developing prices.

Factor in excess capacity and non-value-added capacity (listed for each resource centre at the bottom of the chart on page 52), and the results are shown on page 53 under “Excess Costs.” The percentage identified as excess capacity and non-value-added capacity, multiplied by the operating cost assigned to a resource centre, results in the amount attributable to both excess and non-value-added capacity.

These results were deducted from the assigned costs, resulting in potential cost reductions, as well as providing costs that are market-competitive.

Using the same method applied to the historical costs assigned to activities, you can develop flexible budget rates that are market-competitive and may be used for pricing and rate purposes.

Taking the result of our efforts, let’s go back to that customer who called you. Your idle capacity-five trucks-was caused by lack of business. Assume that a customer has offered business at a rate of $1.15 per mile to Point B, with a backhaul rate of $1.05 a mile with 100 miles deadhead. The customer will commit to 15 loads a week. The total mileage for the outbound trip is 600 miles plus 100 miles deadhead, and the return trip is 500 miles, a round trip of 1200 miles. Applying the flexible budget rates, using actual costs, revenue produced per outbound load would be 600 miles at $1.15 per mile, plus 500 miles at $1.05 per mile, or $1215. The costs would be 91.5 cents per mile at 1200 miles, plus two loads at $37.51 plus 4.89% of 1215, for total cost of $1232.

The result: you’d lose $17 per outbound load, or $255 a week.

Conversely, applying the market-competitive rates adjusted for excess costs, revenue of $1215 is produced, as stated above. The cost would be 80.5 cents at 1200 miles, plus two loads at $30.01 plus 4.98% of 1215, for a total cost of $1085 and a profit of $130 per outbound load, or $1950 per week.

Same scenario, two different results at the bottom line.

Have your say

This is a moderated forum. Comments will no longer be published unless they are accompanied by a first and last name and a verifiable email address. (Today's Trucking will not publish or share the email address.) Profane language and content deemed to be libelous, racist, or threatening in nature will not be published under any circumstances.