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Planning for Profit

31st January 1958
Page 62
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Page 62, 31st January 1958 — Planning for Profit
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Which of the following most accurately describes the problem?

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N overseas reader writes: "My problem is not simple I am thinking of returning to the United Kingdom in the hope of setting up in business as a haulage contractor." His problem would, indeed, not be simple, even if he were based in this country instead of being several thousand miles away.

In trying to answer this kind of inquiry there are obviously so many points involved that they cannot be covered in the form of a letter. In the initial stages it is rather a question of suggesting sources of information. Potential traffic surveys, financial facilities, operating costs and licensing all have to be considered. In this particular instance, as in many other inquiries, it was particularly stressed that some indication should be given of the smallest amount of capital required to start the proposed venture.. That query in itself tends to raise a doubt whether the business is likely to prove successful. If, however, when the newcomer gets down to facts and figures and finds that he is, after all, unable to start up in business as he hoped, no harm is done other than possibly some personal disappointment.

There may, of course, be a second course open-the expenditure of all his resources on the initial purchase of a vehicle, followed by a hand-to-mouth existence of little profit to himself and certainly not to his local competitors.

Sinking Fund

Both with the object of emphasizing to intending newcomers ihe financial responsibility of running a haulage business and suggesting to existing operators a simple method of dealing with those items of expenditure which may not have to be met for some months, I will explain the provision of a sinking fund.

As regular readers are aware, the principle underlying " 'The Commercial Motor' Tables of Operating Costs" is to divide these 10 items into two sections of live each-standing costs and running costs. The former comprise licences, wages, rent and rates, insurance and interest, whilst the latter consist of fuel, lubricants, tyres, maintenance and depreciation.

The 10 items, however, can also be divided between those involving immediate expenditure and those where paymentpossibly of large amounts at irregular intervals-is deferred.

For the benefit of new readers I will run through the items a28 shown in the second column of the accompanying Table 1, explaining how these are obtained. This table refers to the popular 5-ton petrol-engined platform lorry and it is assumed that it will average 500 miles per week. As its unladen weight is in the 24-2-1--ton class,, the cost of the annual duty will be £30 a year or 12s. a week, allowing. for 50 operating weeks a year.

TABLE 2

Wages are assessed at £8 18s. 7d. per week, in which figure allowance is made for two weeks' holiday. with pay and National Health and Employers' . Liability Insurance contributions. Kent and rates are estimated at 10s. per week and insurances at 12s. 10d.

per week based on an annual premium of £32 5s. Finally, interest is charged at 13s. 10d. a week based on a rate of 3 per cent. per annum. Total weekly standing costs amount to £11 7s. 2d.

The major item of running costs fuel is estimated at 4.64d. per mile and lubricants at 0.2Id. Tyre costs are assessed at 1.34d., based on a cost per set of £167 is., whilst maintenance costs 1.95d. a mile. Depreciation is reckoned at 1.80d., the estimated vehicle mileage life being 120,000. These five items of running costs total 9.94d. and in Table 1 corresponding figures are shown in the second column for a weekly mileage of 500. In this case the total is £20 14s. 2d., giving a total operating cost of £32 Is. 5d. for the 500-mile week.

In the third column of Table I only the items which incur immediate expenditure are shown. By coincidence they amount to two each in both sections. The two items of standing c%ts are wages and rent and rates, totalling £9 8s. 7d. Fuel and lubricants give an aggregate of immediate running costs of £10 2s. Id. The four items total .£19 10s. 8d.

Popular 5-tonner •

In the third column are shown the remaining items, on which expenditure will be deferred. Standing costs include licences, insurance and interest, totalling £1 18s. 8d. per week, whilst the estimated expenditure on the three items of running costs is: tyres, £2 15s. 10d., maintenance, £4 Is. 3d., and depreciation, £3 15s., totalling £10 12s. I'd. The six items together therefore amount to £12 10s. 9d.

The 5-tonner has been chosen as an example because it is often the type with which new entrants to haulage set up in business. Existing operators, however, may prefer to note a corresponding comparison between total, immediate and deferred expenditure on operating costs when applied to a rigid eight-wheeled oiler as shown in Table 2. As regards running costs, an alternative method is to make the division between immediate and deferred expenditure in terms of costs per mile. For the 5-tonner this would amount to the cost of fuel at 4.64d. and lubricants at 0.2 Id., giving a total of 4.85d. requiring immediate expenditure. Tyres at 1.34d., maintenance at 1.95d., and depreciation at 1.80d.—total, 5.09d.—would be paid for at a subsequent date.

As shown in Table 2, the corresponding figures for the eightwheeler would be 5.94d. immediate running costs and I0.45d. deferred costs.

Whilst there should be no dispute that wages should be an immediate charge on standing costs, there may admittedly be cases where rent and rates might be a quarterly, half-yearly or yearly payment. In this instance payment is assumed to be weekly. Fuel and lubricants likewise must be virtually on a pay-as-you-go basis and even where bulk storage facilities are available, at least weekly deliveries are the usual procedure.

Of the deferred standing costs, it is obviously prudent to put aside each week a sum towards the renewal of licences and insurance premiums, whether they are met annually or at shorter periods. In practice, interest may be required to meet charges from whatever source the loan may have been obtained. Alternatively, if capital had been provided by the operator himself, there would appear to be no reason why he should deprive himself of the interest which he presumably formerly received.

When an operator sets up in business with a new vehicle it should be some time Infore he will be called upon to meet any expenditure on tyres and maintenance. Nevertheless, this eventuality is growing nearer with each mile operated. Even ,with the 5-tonner the moderate weekly mileage of 500 will have resulted in wear and tear relative to a cost of £6 17s. Id. on the two items.

Likewise, although the haulier is operating a new vehicle, the day will crime when it will have to be replaced.. In this particular instance, if funds for this purchase have not been accumulated at the rate of £.3 15s. a week, the required renewal cannot take place when it is economically desirable.

The tables have purposely been set out in this way to emphasize how a large' proportion of weekly operating costs do not require to be met at once. Yet unless some provision were made to record the items and to check the accumulated funds against current expenditure. the newcomer could soon be in serious difficulties. In the early stages he would probably be overestimating his profit, whilst-later, and possibly even in the final stage, be would have no fund with which to meet essential repairs or renewals.

It is therefore suggested that a record on the style of Table shou14, be kept so that the operator can assure himself that future, as well as present, needs are being provided for.

This would be termed "Sinking Fund" and each form would relate to one vehicle, the number of which would appear on the right-hand top corner; on the left-hand top corner would be shown the number of this particular form so as to facilitate re-ordering of stationery. In the centre of the heading the basic costs of the particular vehicle concerned are recorded, divided into standing and running costs. For the petrol 5-tonncr these would amount to £1 18s. 8d. per week standing costs and 5.09d. per mile running costs, neither of which normally incurs any immediate expenditure.

The main section of the form is divided between income and expenditure. It will probably be convenient to make up the form weekly, the appropriate date being shown in the first column, followed by the mileage for that particular week.

Standing costs, which will remain the same at £1 18s. 8d. a Week, will be entered in column 3. Running costs will be obtained by multiplying the weekly mileage by the basic mileage figure shown in the heading. Columns 3 and 4 will then be totalled in column 5 and as subsequent figures are entered the weekly total in column 5 will he accumulated in column 6 to give the total to date.

The next four columns are given over to items of expenditure. Column 7 provides for the insertion of the date, assuming that it may not always be convenient to coincide entries in this section with the date entered on the same line in column 1. A description of repairs or replacements provided will be shown in column 8 and the appropriate cost. including both labour and materials, in the next column. As with the previous section. the items in this column will be added progressively to give a total to date in column 10.

Finally, in the last column will be entered the balance of the sinking fund to date, obtained by deducting the total shown in column 10 from that written in column' 6. As a result, the operator can see at a glance at any time what funds age available to provide any replacement that will soon be needed— for example, tyre retreads or exchange engine.

Whilst the two items of maintenance and tyres are likely to result in the first withdrawals from the fund, it must also provide, possibly annually, for licensing, insurance and interest payments. and eventually for the replacerrie-nt of the vehicle. S.B.

Tags

Organisations: Sinking Fund

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