Know What Your Profits Are
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UNLESS an operator has fairly exact knowledge of the cost of running his business, he is likely to have misconceptions about the true state of his earnings. This week I visited a haulier friend and found that whilst on one particular contract he appeared to be making a reasonable profit, he was throwing away his earnings on another. He should, of course, have been making a profit on both jobs, and on some others that he was doing. A little knowledge would have avoided any loss.
Most of his work was "jobbing." Much of it was in the town but occasionally ht took a run into the country. There was some prospect of his losing some of his regular work to a competitor who was trying to cut his rate. Before' doing anything, my friend wished me to check his expenses to discover if it would be possible for him to lower his rates and still show a profit.
He was operating a 6-tonner of popular make, somewhat out of date but recently thoroughly overhauled by the manufacturers and in good condition. He told me that he charged 8s. an hour for town work and 9d. per mile for journeys which took him out of town. He could not give me definite figures for the proportions of work done in town and in rural areas, but his average weekly mileage was 400.
He had paid £826 for the lorry. A set of tyres he reckoned cost £125 and a life of 30,000 miles was expected. Tax worked out to 14s. a week and the levy 3s. lid. His insurance premium came to about 8s. a week. The driver's wage, including provision for holidays with pay and insurance, totalled £8 10s. a week. ' The lorry averaged 9 m.p.g. and he purchased petrol at 4s. per gallon. Oil consumption amounted to about one gallon a month and equalled 0.5d. a mile.
No Maintenance Figures This operator had not kept proper figures for maintenance costs, but I said that I would take the figures from "The Commercial Motor" Tables of Operating Costs.
"I make out your actual costs as petrol 5.5d. per mile, and lubricants 0.25d.," I said. "If I divide £125 by 30,000 miles I get a tyre cost of id. per mile. As to depreciation, you gave £826 for the vehicle. Deduct £125 for tyres and £80 for residual value (that is. the amount you hope to get for the vehicle when you dispose of it and replace it by a new one) and £621 is left as the net value.
"If I take it that you will keep the vehicle until it has run 180,000 miles, that gives a depreciation of 0.82d. a mile. If we say 2d. a mile for maintenance, the total for these items is 9.57d., or shall we say, 91d.
"For standing charges we have tax 14s. per week, levy c26 3s. lid., wages £8 10s., insurance 8s., arid interest at 3 per cent. 10s. What about garage rent?" I asked.
"I have none to pay," said my friend. "My brother and I run a large warehouse which is sufficiently free to allow the vehicle to be parked inside," "But suppose this business became more active and you needed the space, what would you do then ?" I pursued.
"I suppose I should then have to pay something for forage rent," he admitted.
Would you increase your rates to meet the extra cost, or let your profits diminish ? "
He acknowledged that he would have to raise his charges, and I told him that if we were to obtain a fair basis for reckoning rates, an amount for garage rent should be included. I suggested 5s. a week.
Addition to Profit
He questioned my allotment of 10s. a week for interest. I explained that it was an addition to profit, "This is the amount that your £826 could earn for you if you hadn't spent it on your vehicle. Having used the money on a lorry you are not earning a net profit until the amount of interest is clear," I explained.
The 'total of standing charges came to £10 10s. 11d., and I added an amount to cover establishment expenses to make €12 1 ls. On the basis of a 400-mile week, running costs at 94.d. a mile aggregated £15 16s7td. This sum, added to the total of fixed expenses, made a weekly cost of £28 7s. 8d.
"At 8s. an hour," I continued, " your total revenue from the time charge is 8s. times 44 (hours), which is £17 12s. Add to that the revenue from 400 miles at 9d. a mile and you obtain a grand total of £32 12s. The profit is £4 4s. 4d. a week. This is reasonable. However, you -do not obtain that amount unless you operate 44 hours a week and cover 400 miles.
"Suppose that there are some weeks when you work only 30 hours and cover 240 miles. Your fixed charges are unaffected. They will remain at £12 I ls., whether the vehicle runs for 30 hours or 44 hours. Your running cost per mile does not alter but as the weekly mileage is only 240, the expense is only £9 10s., making a total of £22 is.
"Revenue is for 30 hours at 8s„ £12, plus 240 miles at 9d. a mile, £9, so that earnings are £21. Instead of making a profit, you lose £1 is. a week. You will have to raise your rates.
' "This idle period of 14 hours is the trouble. Let us check the standing charges first. The full amount of £12 its. spread over 44 hours equals 5s. 8A. an hour, so that your charge of 8s. covers your time cost if you work 44 hours. If you do not, your expenditure per hour will increase until at 30 boors a week your hourly cost becomes 8s. 4cI.. which LS greater than your rate.
"With your vehicles tied up so closely with the one customer, a request for an increase in rates will be unacceptable to him. After all, it is not his business to keep you employed in order to maintain your prices. Your difficulty is shortage of work.
"Let me take out the figures on the basis of a 50-hour week. Standing charges are affected because there must be added £1 6s. 3d. for overtime, making a total time cost of £13 17s. 3d. instead of £12 I I s. The cost of running 400 miles stays at £15 16s. 8d. Tota4 weekly expenditure, including provision for establishment costs, is thus £29 14s. to the nearest shilling.
"Your revenue is for 50. hours at 8s., which is £20, plus £15 for 400 miles at 9d. a mile. The total is £35 and the profit £5 6s. Now you see how important it is to keep your vehicle at work. At 44 hours a week, you make a profit of £4 4s. 4d., at 30 hours a week you lose £1 Is., and at 50 hours a week, you gain £5 6s."