A Reserve Fund for Hire Purchase
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Help for the Owner-driver who has Recently Returned to Haulage without Large Capital Resources and has Acquired One Vehicle by Deferred Payments
IN the previous article I started to deal with the problem of ensuring ability to pay hire-purchase instalments. I took as an example a 6-tonner, the cost price of which was £900. I assumed that the initial payment was £250 and that the instalments to cover a period of 18 months were at the rate of £40 per month, of which £5 was interest payment.
I am assuming this is the case of an owner-driver just getting back into business and not actually blessed with any reserve of capital once he has paid his £250 down.
I pointed out that in pre-war years operators often got into trouble and cut rates because they had not the cash for the instalments when they became due. I suggested that a way to avoid the risk of getting into that position was to build a reserve fund and promised that I would describe how that reserve fund should be accumulated.
Certain figures for operating costs were agreed, but as these will become evident as I proceed with this article, I do not propose to repeat them now.
The important point to note is that during the first several months of the vehicle's life the operator will be called upon to pay for no more than petrol, oil, garage rent and his own wages as driver, which presumably he will need for his domestic expenses and so on.
It is assumed that his average weekly mileage is 800 and that his rate is Is. per loaded mile, so that making quite a favourable assumption as to the ratio of loaded to total mileage, it can be taken that his net revenue is 9d. per mile run.
The rest of my observations on this situation can be gathered by reference to Table I, in which are set out figures for current expenditure, revenue, reserves for future expenditure on operating the vehicle, and establishment costs.
Money in Store
The point that I am trying to make is that whereas his immediate expenses on operating costs are confined to the above items, he should be putting on one side reserve funds for future expenditure on tyres, maintenance, renewal of vehicles, renewal of licences, insurance premiums, future expenditure on establishment costs and so on. Out of 'these reserve funds for such expenses he can pay his instalments on hire purchase, it being practicable to pay back these borrowings from those funds after expiry of the 18 months over which the instalments are to be paid.
In compiling the figures for this table 1 have assumed that delivery of the vehicle was taken towards the end of July and it was actually put on the road on July 28, so that the first week of its use terminated as is shown in the table on August 2, 1947. During that week the vehicle ran 800 miles and the gross earnings (at 9d. per mile run) amounted to £30.
Now for what I call the immediate outgoings: The vehicle is an oiler and its average fuel consumption is 18 m.p.g. and that at Is. 71d. per gallon is 1.08d. per mile. LAI-leafing oil I set down at 0.I0d. so that tlea total expenditure on fuel and oil is 1.18d. per mile. That gives us a total for 800 miles of £3 18s. 8d., to which 1 add £5 per week for wages, 10s. per week for garage rent, and £1 per week for day-to-day expenditure on establishment charges,
A38 giving a total of £10 8s. 8d. per week, That is set down in Column 4 of the table under the heading of "Regular Outgoings." He has no other expense that week, so that his gross profit is £19 1 Is. 4d., which is set down in the sixth column.
Now we come to consider the weekly amounts which he puts to reserve. The first of these is in respect of provision for future expenditure on tyres. I assume that the tyres are 34 ins. by 7 ins, and that the cost of a complete set of six tyres is £85. Assuming the average life of the tyres is 17,000 miles that is a cost of 1.2d. per mile and for 800 miles that is £4.
The cost of maintenance was argued in detail in the previous article and a figure of Id. per mile agreed upon. Eight hundred miles at Id. per mile is £3 6s. 8d., which appears in the appropriate column. So also for depreciation, which, too, was agreed at Id. per mile, we have a further £3 6s. 8d.
Provision for Future Expenditure
Next comes provision for future expenditure on the standing charges and establishment costs. For that there is licence, which is 14s. per week; insurance, which is £1 per week; provision for interest on capital outlay, 14s.; the balance of establishment costs which I have assumed to be £1 10s. per week. The total of those is thus £3 18s. The sum total of these weekly reserve funds is thus £14 Hs. 4d. per week. Subtracting that from the gross profit of £19 lie. 441. shown earlier in the table, we get the final figure of net profit for that week oft£5. That procedure is followed week by week and in the twelfth column I show how the reserve fund stands to date, rising from £14 us. 4d. in the first week to £195 7s. 2d. in the twentieth week.
Certain other items require explanation and the first od these is for the amounts set down in the fifth column under the head of "Irregular Outgoings." This column is put there to peovide for expenditure as it occurs in respect of actual purchases or payments in respect of some of the items for which the reserve fund is intended, namely, tyres, maintenance and so on. For example, during the week ended August 23 there is an amount there of 10s. That is for overhaul of injectors and is rightly taken from the reserve fund for maintenance and provision for that deduction is actually made in the amount of the reserve fund as total; that is to say, but for that the reserve fund would have been £59 17s. 4d. It is shown as £59 7s. 4d.
Similarly, during the week ended September 13, a new element was fitted to the oil filter on the engine to the cost of 13s. That has been allowed for by a deduction from the total reserve to date. During the week ended November 1 he purchased a new set of atomizers for £30, which lowered his total 'reserve to date so that for that week at £175 Sc. 6d. it was less than the week before at £186 3s. 6d.
During the week ended November 13 he purchased two covers and during the Week elided November 29 a further two covers and so on. A point that I want to make is that all these irregular outgoings have been properly deducted from the total reserve to date.
• A further and incidental effect of these irregular outgoings is to be observed in the figures given for gross profit.
For example. in the week ended November 1, that in which he bought the new set of injectors, there is actually a loss shown of £9 2s. 7d. during that week. Furthermore, when provision is made for the amounts to be set out to reserves it is shown in the last c.oltinin Net profit per week " that his total loss during that week was actually £24 4s. 7d.
Now as he purchased the vehicle on July 28, he must pay £40 as the first of his instalments on August 28, and so we sec that in the week ended August 30 a deduction of £40 is made from " Total Reserve to Date" reducing the amount of £72 17s. 4d. to the £.32 17s. 4d. shown in the column " Reserve Less 11.P Payments,"and that goes on all the time. For example, again in the week ended October 4, a further £40 is deducted and his balance of the reserve fund is reduced to £64 2s, 6d.. and actually by the end of the twentieth week, that is December 13. whereas his total reserve to date is shown as £195 7s. 2d., he has taken from the reserve fund four instalments of £40 each and his net reserve is only £35 7s. 2d.
£14 a Week "On the Ice" It might be thought that this reserve fund is getting dangerously low, having in mind the fact that in another fortnight from December 13 he will have to find another £40. Actually there is no likelihood of the reserve fund failing to meet his commitments for he is putting away an average of about £14 per week, so that in another fortnight the reserve fund will have risen to £63, out of which he need pay only £40 for instalments, and it should be observed, moreover, that during the period covered by the table he has recently equipped the vehicle with a new set of tyres, so that any immediate expenditure of importance is not likely to arise for some considerable time.
It is not the case, as might possibly be imagined, that at Is, per mile gross. 9d, per mile net, this operator under these conditions is working on a too narrow margin.
His total gross expenditure for the 20 weeks, that is to say the expenditure comprised in the figures set down in the fourth column " Regular Outgoings" and in the eleventh column "Total Weekly Allocations " is £498 14s. 4d. A minimum net profit on that expenditure, calculated at 15 per cent., would be 1.75, At 20 per cent., which might be taken as a reasonable figure, it should be £100.
The calculation of his actual net profit is not quite so straightforward as might seem on the surface. It does not, for example, consist of adding together the total of the profits shown in the last column of the table, and deducting from them the four amounts debited as (I) loss. The reason why that would be the wrong course is that the amounts which have appeared as loss are due to expenditure which is already provided for in the reserves and has already been included in the above calculation. Similarly also with the amounts for 10s., 13s,, 12s. 6d., it 2s. 6d. under the heading " Irregular Outgoings." They must be added to the net profit and by doing so we get a grand total of £99 as., so that actually his net profit is almost exactly 20 per cent. of his expenditure.
Mileage and Net Profit
What is worth noting about these net profit figures is the enormous difference which the weekly mileage makes to the net profits. This is shown clearly in Fig. 1, which is a diagram showing the relation between the net profit per week and the mileage run. It will be seen that for anything over 800 miles a reasonable profit is made. but for anything under 800 the margin becomes too narrow. At 800 miles, as a matter of fact, the profit is approximately 20 per cent. on the expenditure. At anything over that it increases above 20 per cent.. hut below 800 miles it fails to reach that reasonable standard,
Operators should watch that point carefully in making their assessment of rates. Actually, it should be apparent, on reference to "The Commercial Motor" Tables of Operating Costs because, with a vehicle of this type, running 800 miles per week, the haulier's charge should be 11 d. per mile run, but at 600 miles per week that is increased by 11-d. to Is. Old. Therefore if he is making, as I have described above, 9d. per mile net, or is. per mile run, he is actually showing a profit, even more than is shown in the tables, but at Is. per mile and running only 600 miles per week he is working at d. per mile les-: than shown in the Tables and the amounts there are, as 1 have so
frequently emphasized, minimum rates. S.T.R.