Understanding Cost Averaging: A Must for Expedited Freight Success
In expediting transportation, maintaining a stable income involves more than just maximizing earnings per trip. Over the long term, a balanced approach that considers both short and long distances can lead to greater profitability. One strategy that can greatly help achieve this balance is Revenue Averaging.
What is Revenue Averaging?
Revenue Averaging is a financial strategy aimed at achieving a consistent average revenue rate over time, irrespective of the individual revenue per trip. This becomes especially important in the expediting transportation sector, where earnings can considerably fluctuate between short and long-distance assignments.
Applying Revenue Averaging in Expediting Transportation
Let's delve into an example with a specific goal: achieving an average revenue of $1 per mile.
Suppose you embark on a long trip of 1000 miles, earning 75 cents per mile, resulting in $750. To balance this and achieve an average revenue of $1 per mile, you would need to undertake short trips that earn a higher revenue per mile.
Let's say for short trips of 200 miles each, you earn $1.50 per mile, amounting to $300 per trip.
To balance the long trip and reach the $1 per mile goal, you would calculate the total miles driven and total revenue with one long trip and one short trip. That's 1200 miles ($750 + $300) driven with $1050 in revenue, equating to an average of 87.5 cents per mile.
Adding another short trip of 200 miles ($300) would total 1400 miles driven with $1350 in revenue. The average per mile is now approximately 96.4 cents.
Adding one more short trip will exceed the target. The totals become 1600 miles and $1650, yielding an average revenue of approximately $1.03 per mile.
Hence, to achieve the goal of $1 per mile, you'd need to complete one long trip (1000 miles at 75 cents per mile) and three short trips (200 miles each at $1.50 per mile).
Importance of Tracking Average Revenue Per Mile
For drivers, it's crucial to keep track of their overall cents per mile average for their business. It's not just about the revenue from each trip, but rather, the average revenue across all trips. This average will provide a clearer picture of your overall financial performance and help guide decision-making for future trips. If the average revenue per mile is lower than desired, strategies can be implemented to increase it, such as taking on more higher-paying short trips.
Benefits of Revenue Averaging in Expediting Transportation
Mitigate Earnings Variability: The variable nature of trip earnings is a constant in expediting transportation. Revenue averaging allows you to maintain more consistent earnings.
Revenue Planning: Revenue averaging aids in predicting and planning your earnings, contributing to financial stability over time.
Strategic Job Acceptance: Knowing your target average revenue per mile can guide your decision-making process when accepting jobs, helping you maintain a balanced portfolio of short and long trips.
While revenue averaging can't guarantee that every mile driven will earn exactly $1, it's a strategy that helps balance out earnings over time. It's an effective way to ensure that, despite varying distances and earnings per trip, your expediting transportation business achieves stable income in the long run.