OPTIMISM in Costing is BAD BUSINESS
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The Haulier—and Especially the Owner-driver—is Courting Disaster by Under-estimating Costs and Charging Rates that Cannot be Sustained Whenever his Fleet Expands
TABLES I and II are reproduced from last week's article, in which I dealt in full detail with Table I. I explained that I am persuading an operator to make provision for future expenditure in his actual estimates of costs. In Table I, 1 showed that current expenditure on running costs
• was 2.10d. per mile, and that provision for future expenditure on tyres, maintenance and on the provision of funds to buy a new vehicle when that was required—in effect, depreciation—amounted to 3.82d. per mile. The total running cost per mile is thus 5.92d.
That 3.82d. is to be regarded as a sinking fund, and I shall come back to it later. Meantime, on reference-to Table II, it will be appreciated that the make-up of that is similar to that of Table L It would appear that there would be little opportunity for argument about standing charges. The very description of them, indicating that they are to a large extent fixed and unavoidable, would seem to obviate any need for extended discussion. On the contrary, there is sometimes more difficulty in persuading operators of the need for including these standing charges, than in making them understand running costs.
Owner!,drivers Hard to Persuade
It is with the owner-driver that most of these difficulties arise. That is unfortunate, because the newcomers to the industry to-day are mostly of the owner-driver type. The owner-driver has certain idiosyncrasies in connection with the calculation of operating costs which are most difficult to eradicate. Two of particular importance are items of current expenditure, namely, wages and garage rent.
Most owner-drivers take the view that it is not necessary to debit the vehicle with the cost of driver's wages, because no wages are paid. I dealt with this matter in my report of the interview I had with a beginner a few weeks ago. The point, however, is so important that no harm would be done by stressing it and, perhaps, viewing it from a slightly different direction.
In dealing with this fallacy I have two stock arguments. If a man be content with the equivalent of driver's wages or less—generally it is less—as the reward for operating a vehicle as a haulage contractor, he will be far better off if he offers his services to a reputable haulier or a C licensee, A36 In that way he avoids the increasingly onerous responsibility of ownership. He avoids the risk which every man must take who engages in business of his own and he is relieved of finding work for his vehicle, as well as doing that work. He need have no particular dread of nationalization.
A conscientious owner-driver does not have an easy time. He has to drive the vehicle just as though he were an erriployee. In addition, he has to canvass for work. He has to keep his books, although admittedly many are lax in that respect and often he has difficulty in securing payment for his work. In addition, of course, he has to take care of his vehicle. It will readily be understood that so far as actual driving time is concerned, he is on a par with his fellow drivers. His real working day may quite easily be twice as long and his working week is almost invariably comprised of seven days.
Driver's Wages Not Enough
It is surely absurd, ihen, for him to be content with the scant remuneration left after eliminating driver's wages from his cost sheet and quotes for work on the basis of all other costs plus a small margin of profit.
The second of my arguments is that most men, when they enter into business on their own account, do so with the idea that the business will grow. Now, so soon as a second vehicle is put into commission, two things happen. First, there is to be a driver for the. second vehicle and his wages will have to be paid in full. Secondly, the original ownerdriver will find that he has too much to do in management, that is to say, in securing work, in making out his accounts and so on, to be able to drive the first vehicle. Therefore, he has to employ two drivers.
What is he going to do if he has originally based his charges on costs which do not include driver's wages ? He is surely in a predicament, for he is going to find it difficult to increase his rates to existing customers, and if he cannot do so he is going to work at a loss. Therefore. I alWays suggest to a newcomer who is an owner-driver that it is wise to start in a manner that will cause no difficulty such as this, when an additional vehicle is put into service.
Of these two arguments, the first, surprisingly enough, does not carry much weight. Many drivers are content with a comparatively small margin of profit to offset their inde
pendence. If a man takes that view, he is difficult to persuade to adopt a common-sense attitude towards costing schedules, at least as 'regards driver's wages. The second argument carries more weight. There are few who do not visualize themselves eventually as owners of small fleets, even if they be compelled to work within a 25-mile radius, and they are more inclined to treat with respect my arguments concerning driver's wages as a cost item.
There are many operators who are inclined to omit the second of the "current expenditure" items in Table 11. garage rent, on the ground that the vehicle is housed in some shed which is their own property. In that case, my only argument is that if there be someone who is willing to pay 5s. or 7s. 6d. per week for that accommodation, which in these days is more than likely, that amount should be debited against the vehicle.
There is not, as a rule, much argument about the other three items, bin-they are not accepted without question by every newcomer.
What is " Interest " There is always a certain amount of resistance to the item "interest," and I usually have to deal with that_ at length. It is a pity, because it is a small amount, really hardly worth bothering about, except on the point of principle. Itiihe early days I used to argue this point with 90-95 per cent, of the hauliers I met. Five to 10 years later they came back at me, more often than not, with the suggestion that the interest I charged was not sufficient !
Briefly, "interest" is the amount which would be gained by the capital outlay on the vehicle if it were to be invested in some safe security, or if it were to be lent to someone. In the case of a vehicle costing £1,000, that sum, properly invested; might be expected to bring in a revenue of about £40 per annum, or, say, -16s.per week.
It is always difficult to impress hauliers who are not experienced in any sort of accountancy, with the need for that provision. Part of the difficulty arises from the fact that, far froth being a capital expenditure, it is really some thing which 'goes into the operator's pocket. For the schedule of operating costs to be complete, however, it must be included.
'Arguments about insurance usually turn on the necessity of comprehensive cover. I have never favoured insurance against third-party risks only, especially in the case of a man whose capital is limited. A bad accident which wrecks his vehicle may, in the absence of proper insurance, put him out of ,business altogether. I have often been asked if there be not wisdom in accepting the rebate on premium which the insurance company offers when the 'insuree will agree to pay the first £5. £10, or more of the loss resulting from any accident. There may be. an economy if the haulier has only one accident a year, and expenditure on repairs be less than the reduction in premium. , If, however, he has several accidents within that year, expenditure on that account would be considerably greater than the saving on 'premium.
These comments apply particularly to the owner-driver who has a small margin of capital, and particularly, of course, to the one who has no capital nt ail and has bought his vehicle on the hire-purchase system. An experienced operator of a small fleet, who has facilities for carrying out maintenance and repairs, may adopt an entirely different attitude. It is possible in those circumstances that there may be economy in accepting this condition.
The capital amounts quoted in Table II for insurance are
not themselves of great importance.They cannot, however, be wide of the mark. What I am aiming at in this series of articles is the establishment of a principle; I am not trying to lay down figures of actual cost of operation. The total, according to the figures, is £7 12s. per week and that amount, spread over 44 hours per week, is 3s. 51e1.— say 3s. 6d.—per hour. With that figure and the 5.92d. running costs, which may be referred to as 6d. per mile, the haulier can, with a minimum of calculation, assess his actual operating costs for any kind of job. He can, for instance, deal without my assistance with a query which was put to me only this week, when an operator wanted to know what his costs would he for delivering materials 10 miles, 20 miles and 40 miles from his headquarters.
had to write to that operator and ask him for more information, for, as he did not name the materials, I had DO idea what would be the time required to load and unload, and whether the vehicle might have to wait in it queue. 1 told him, therefore, that I must have some information as to terminal delays before I could give him a fair answer to his questions.
The method of making a calculation with that information at hand and with these figures for the standing charges per hour and running costs per mile, is a simple one which I have explained many times. All that is necessary is to take the total time needed for any particular journey, including waiting periods, as well as loading and unloading time, and assess it on the basis of 3s, 6d. per hour. The result of that calculation must be added to the amount for mileage at the rate of 6d, per mile.
As an example of the sort of calculation I have in mind, take a job of a kind familiar to owners of this type of vehicle, namely, the conveyance of market-garden produce
to the market of a big town. Let me assume that the distance from the garden to the market is 30 miles. The time required to load is half an hour and to unload, half an hour. Unfortunately, the congestion at the market is such that a fair average of the time which the driver has to wait in the market before he can unload is two hours. Total terminal delays, as they are called, is three hours.
Journey Time is Six Hours Assume also that the time occupied on the journey is
11 hours in each direction. The total time spent in ,travelling is thus three hours and the grand total for the complete journey is six hours.
The actual cost to the operator (not by any means the charge which he must make to his customer) is for six hours at 3s. 6d., which is El Is., plus 60 miles at 6d., which is El 10s. The total is £2 1 Is.
In this series of three articles I am not concerned with charges and I will not, therefore, confuse the issue by discussing the minimum charge which should be made for this job. I will, however, ask operators who are using 5-tonners to compare these figures for actral net cost for a job of the kind described, with what they may be receiving, and ask them to begin to consider whether there is a sufficient margin between the cost figure thus calculated and the amount that they are receiving, to allow for certain other expenses (which I do not propose to discuss in these articles), as well as for a reasonable minimum net profit.