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Rate Cutting Returns Through Ignorance

23rd December 1949
Page 54
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Page 54, 23rd December 1949 — Rate Cutting Returns Through Ignorance
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Which of the following most accurately describes the problem?

Fears of Being Unable to Obtain Long-distance Permits After The Appointed Day Are Leading Hauliers to Compete More Intensively in the Short-distance Field—A Dangerous Situation for Many

SOMEONE_ has written that the old saying "History repeats itself" is only true if every repetition differs from all'previous ones, I think that the present state of the free haulage industry in some districts confirms that view. There appear to be ,too Many vehicles for too few loads in some areas and this state of affairs is having the usual effect; history is repeating itself inasmuch as many small operators, fearing to lose the traffic that they have, are cutting rates in the belief that this is the only way to meet competition.

It is quite clear, moreover, that they are taking that course blindly and quoting rates without first making sure that their return is going to be profitable. Even where the operator does check his costs against his earnings, actual or potential, he is not always on safe ground. There are still so many cases in which a haulier's summary of cost is not complete so that the apparent profit, if any, is nothing like so great as it appears.

This is particularly likely to happen in the case of a comparative newcomer, a man who perhaps has taken over a small business and is unaware of the fall extent of his liabilities in respect of future expenditure on the operation of his vehicle.

I came across just such a case recently when one of my haulier friends wrote to me stating that be was "up against it." As it so happened I was in his district soon after I received his letter and was able to make a call.

He had just taken over a small business and two 5-ton lorries, One of these was engaged upon a steady contract, not a very profitable one (in the upshot I discovered that it was not quite so profitable as he thought), but providing reasonable remuneration and helping to clear his overheads.

The contract related to local haulage from a railway goods station to a factory. The work was regular, occupying eight hours per day, 51 days per week, but the mileage rarely exceeded 120 per week. Remuneration had beea fixed at £2 15s. per day.

Hauliers Apprehensive

One of the effects of nationalization in that district, in which there is a number of free hauliers who hitherto have been able to make good by combining a little mediumdistance haulage with their local work, is that the operators concerned are becoming apprehensive as to the prospects of being able to obtain permits to continue with the mediumdistance work. They are, therefore, endeavouring to find alternative traffics upon which they can keep their velf:cles engaged when the time comes for them to cease this medium-distance operation. As a result, my correspondent is anticipating, apparently with justification, that some of his fellow hauliers will be after his particular job. Indeed, my friend had been warned that at least one of his competitors had offered to do the work for less than the current rate. How much Jess was not stated, and my advice was desired by this correspondent to enable him to decide whether he could cut the rate and still earn a profit.

"I should say that the rate at which you are working is about as low as you can go," I said, "for there is very little profit available on that price."

"How much would you think ?" he asked.

I turned up a copy of "The Commercial Motor" Tables of Operating Costs and said: 'About £3 10s. to £4 per week."

.636 "There," he said, proudly, "there is nothing the matter with that, is there?"

"It is all right," I answered, so far as it goes, but, unfortunately, it does not go far enough. In the first place, the items you have set down are not correct. The amount of £5 2s. for wages is not enough. There is nothing in that amount and nothing elsewhere in your statement to provide either for National Insurance, or workmen's compensation. Further, there is no provision in that amount for the fact that approximately two weeks in the year you will have to engage a spare driver while this man is on holiday.

A Sketchy Schedule "Don't you ever buy tyres for this vehicle?" I continued, "and does it cost you nothing for repairs; and what about depreciation and interest on first costs?"

"And you are seriously thinking of revising your price in a downward direction with no better knowledge of your actual costs and profit than that afforded by this sketchy schedule," I commented. "I think the best thing I can do is to set out a full schedule of costs when you have had the lorry long enough to be able to collect actual data."

I set out a schedule -comparable with his own figures as follows:— He asked me to explain why W.C.A. insurance had to be paid now that the National Insurance scheme was in farce. I told him that there is still a liability under common law which is not covered by the National Insurance scheme. Claims are not likely to arise, for as a rule any such claim is the outcome of an accident or damage resulting from something done by one employee which affects another. It is nevertheless wiser to insure against the risk and, in any case, the cost is very little..

"How do you get at the figure you have down there for provision for holidays?" he asked.

"There are 52 weeks in a year and it is usual to reckon on two weeks of holidays, that is 1/26th, and I take 1126th of a week's pay, approximately 4s. The figure is not exactly right, but it is near enough for our purpose," I explained. "For tyres," I continued, "I have taken a figure of 0.8d. per mile from "The Commercial Motor" Tables of Operating Costs. If you accept that figure then 120 miles at 0.8d. per mile is exactly 8s.

The figure of 0.8d. is based on the experiences of many users of 5-ton lorries which tell me that the operator of a 5-ton lorry with 34 by 7 tyres can usually expect to run about 27,000 miles per set. The cost of a set is about £90, and dividing that by 27,000 gives 0,8d.

"I see you have two items for maintenance," he observed.

"It is usual now to classify maintenance Under two heads," I explained. "One, which I 'refer to as maintenance (d), is assumed to cover maintenance operations which are carried out on a time basis rather than mileage, in particular'such things as washing, polishing, geperal adjustments, greasing and oiling. In .a case such as yours, when the work is done either by the driver during his ordinary working hours or possibly by yourself, then I assume that there is no actual expenditure directly involved and that is why I have entered no amount in the account.

Item of Interest

"Maintenance (e) covers all the expenditure on repairs, overhauls; engine reboring, throughout the life of the vehicle calculated at a cost per mile. The figure I have taken is 1.22d. from "The Commercial Motor" Tables of Operating Costs, and that works out at 12s, 3d. per week for 120 miles." "One more item, that of interest. Where do you gel that? " he queried.

"That is the interest on the money spent on the vehicle," I said. "It is the amount that the money would have earned you at three per cent, per annum if you had invested it, and the item is included in a haulier's accounts for the reason that his undertaking is clearly not showing him a net profit until he has first of all got that amount back again, for he could have earned that three per cent. without buying a vehicle and doing any work at all. It is really only a book item. Actually, instead of paying it out you really receive it inasmuch as you count it against the vehicle and do not include it in the profits you earn.

"Now let us get down to brass tacks. You know that instead of, as you thought, earning a gross profit of £7 Is. 6d. per week you are earning only 'a gross profit of £3 I8s. 6d." " What will happen then if I cut my rate to £2 5s, pe.r day?" he asked.

I replied: "You are simply doing to reduce your gross profit. by 5i times 10s., that is 55s. per week, so that your

gross profit will then be reduced to 3s. 6d.

The £3 18s. 6d. which you are at present earning is not actually all profit," I continued. There are certain other expenses involved in the operation of your business which we have not as yet-discussed. • They are there nevertheless and must he deducted from your gross profit to discover what is really your net profit.

Wages for Management

"You have a telephone to pay for. You have audit fees and travelling expenses. There is a certain amount which you should draw yourself for wages for managing the business. There is depreciation on your garage fixtures, subscriptions to associations, bank charges, printing and stationery, postage. and A and B licences. Have you reckoned anything for all those? "If you add them up and do not omit anything I am certain that they will come to not a penny less than 30s. per week and probably as much as .£2. So you see that even at your present rate your net profit is no more than from it 18s. 6d. to £2 8s. 6d. per week per vehicle."

"I must say," he 'said, "I do. think you have opened my eyes to-day. When you came in I thought I was making a net profit of more than £7 a week. Now that you tell me it may be as little as CI 18s. 6d. the job is not worth. while at that. If I am making that with each of my vehicles I am not making £4 per week.

"The conditions are these," he continued. the other vehicle is used only now and then. I drive it myself. I had been thinking that that one was earning £4 to £5 per week. In view, however, of. what you have just said, it may be that I am wrong as regards that vehicle, too. I do not see much sense in taking the responsibility of finding work for two lorries and driving one of them, doing all the clerical. Work, getting orders,. making out -accounts, and, what is more, Making people pay me what they owe, if all I am going to get out of it is considerably less than £4 per week. I shall have to think it over and maybe I will get in touch with you again. You h-ave made it clear to me that it is better to carry on charging a reasonable rate than to run the risk of working at a loss in an attempt to undercut my competitor."

That goes to show that a good deal of rate-cutting results from ignorance. This particular haulier had practically decided to reduce his daily rate from 55s, to 44s. in order to meet competition. So soon as he was made aware of the full extent of his operating costs and advised carefully that his vehicle operating costs were not all of his expendi ture, he began to reconsider that decision. S.T.R


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