Q Having studied the layout of your Tables of Operating
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Costs we should like to know why you include interest at 10 per cent in the initial cost of the vehicle, because interest on capital, in our opinion, should be reflected in the profit margin.
Also, as the vehicle depreciates annually, which is allowed for in your running costs, surely the 10 per cent interest should be on a reducing scale. Could you clarify this matter, please?
If, as we do in our own costings, we record depreciation as a standing cost, we consider it may be wrong to allow an interest charge, in addition, and by doing so may price ourselves out of business. Any advice on these aspects will be appreciated.
APrimarily the Tables are intended for the
small operator who often dislikes doing any costing at all, so that simplicity in compilation and use is of prime importance. On the question of interest on capital outlay and its reducing value, you are quite correct in claiming that in theory a haulier should establish a sinking fund in which will be accumulated the cost of vehicle replacement for the time when that is necessary.
During the interim such funds could be invested and therefore offset the original interest charge on the initial payment. In practice, few small hauliers would do this and are more likely to use the funds for working capital for which—again in the interests of simplicity----no provision is made in the Tables. If it were, this would to some extent offset the reducing interest on the lower value of the vehicle.
Another approach to this question of interest on capital outlay is to maintain that if originally an intending haulier had the amount necessary to purchase a vehicle already invested at currently high rates of interest, then until he is earning more than what he would be receiving in interest (nominally assumed to be 10 per cent) he is not in practice making any real profit in return for the responsibility of running a haulage business. Until he improves on the figure of 10 per cent he just might as well have left it invested and have been free of managerial responsibility,