Providing for Hire Purchase
Page 48
Page 51
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/AM going to describe a method of providing for the payment ofinstalments on hire purchase so that the haulier can pass through a difficult period, keep up his payments, and still be able to keep his cost reserves without getting into such a state that he has to cut rates.
I can perhaps demonstrate my meaning better if I take a concrete case. Take an oil-engined 6-tonner which, fully equipped and ready for the road, will cost about £1,500. If it is bought through a hire-purchase agreement there will be an interest charge, an accommodation as it is sometimes called, of about £150, making the price £1,650.
The initial payment in connection with such a contract, extending. over 18 months, will be about £400 and the monthly payments approximately £68. Of the latter sum, £62 15s. is on account of the actual cost price of the vehicle and the remainder, £6 5s., the proportion of interest payment. The £62 15s. is to be taken out of the profits the haulier makes and the £6 5s. is an establishment cost.
Now with this vehicle, it is unlikely that he will make sufficient to pay, out of his profits, the sum of £68 each month. The cost of operating such a vehicle, according to " The Commercial Motor" Tables of .Operating Costs, will approximate to Is. Id. per mile, made up as follows: standing charges; licences, I4s. per week; wages, including payments on account of National Insurances, £6 I6s.; garage rent anti rates. 10s. 6d.; insurance, 17s.; interest on capital calculated at 3 per cent. on the. cash price of the vehicle, 18s. The total so far is £9 15s. 6d.
The running costs, in pence per mile, will be as follows: fuel, 2.51d.; lubricants, 0.18d.; tyres, I.80d.; maintenance (d), 0.31d.; maintenance (e), 1.43d.; depreciation, 2.7Id. The total is 8.94d. per mile. For a week of 600 miles, the running costs will be 600 times the above, making £22 7s. 10d. Add the total standing charges per week and we get, as a total figure, £32 3s. 4d. For four weeks the debit is £128.
Earnings Fall Short
According to the Tables, the earnings should be at least £42 per week or £168 per. month. That is a convenient figure. As it allows the haulier exactly £100 when he has paid his instalments. But he has not got that £100. His bare operating costs have just been shown to be £128, so that instead of being able to pay his instalments out of profit, as he must, he is actually £28 down in the month: Of course, he may earn More than that £168 per month. Actually, it is distinctly stated in the Tables that the rates assessed on these figures must be taken to he minima; the haulier should earn more than the Tables recommend if he can. But, in this article, we are going on the assumption that he earns no more than the stipulated £168 per month. Let us see what are his unavoidable commitments.
First, there are the licensing and insurance of the vehicle. Put the insurance down at £44. Probably he will take out a quarterly licence which will cost him nearly £10. It will be convenient if at this stage he buys a drum of engine oil.His "down payment on the hire-purchase acquisition of the vehicle I am going to assume is paid out of his original capital.
It should be now realized that his expenses in the near future are for the time being confined to garage rent and the purchase of oil fuel. For all the other eight items of operating cost some sort of reserve fund must be built up 538 and it is in the manipulation of this fund that the provision of hire-purchase instalments can be made.
It will be noted that up to now! have made no reference to establishment costs. 1 have not overlooked this unavoidable expense becadse I wish to deal with it later. There are one or two items of the operating costs which I must clarify before going any further.
First, the driver's wages. Although this newcomer to the industry is going 'to drive the machine himself, he must nevertheless take the appropriate amount out of his income and pay himself the proper amount for his wages.
Now as to maintenance, the total average cost for a vehicle of this type amounts to 1.74d. per mile. That is the sum quoted above as taken from the Tables, comprising 0.31d. per mile for maintenance (d) and 1.43d. per mile for maintenadce (e). In the case of an owner-driver, some of this expense'may be avoided, because he himself will do the work in his own time and at no extra cost.
A full scheme of maintenance, the cost of which is included in the above figure of 1.744. per mile provides for all the work of washing, polishing, greasing and adjustments, as well as overhauls and service operations, being debited against the vehicle. It is assumed that the work is done either by a separate staff or by some outside contractor, such is the local motor agent for the make of vehicle used.
Owner Maintains Vehicle
The beginner, the man for whom this series of articles is written, is not in that position. He himself will wash and polish his vehicle, grease it, make adjustments and perform many of the maintenance operations such as decarbonizing, valve grinding, possibly even brake-refacing and so on. If he has not sufficient work to keep him on the road all the week, he would be wise to proceed in that manner and thus economize in his operating costs. I am going to assume that such is the case, and to that end will take a figure of 0.9d. per mile for maintenance instead of I.74d:
As I have demonstrated earlier in this article, only the expenditure on garage rent and fuel is needed for the first few weeks of vehicle operation. Sufficient oil has already been purchased to last for some time; expenditure on tyres, it is hoped, will not be necessary for some 20,000 miles or so. There should be no need for anything to be spent on maintenance for quite a long time. It is assumed that the vehicle has been carefully vetted before purchase and is as good as new. Probably the first occasion for any further expense will come at the end of the first three months of operation when the licence for the second quarter of the year will have to be purchased at a cost of £10. This is one of the items that must be budgeted for in advance.
To resume this story of expenditure. I have assumed a weekly mileage of 600. If 1 take it that the fuel consumption is at the rate of 18 m.p.g., there will be 33 gallons needed each week costing, at 3s. 9d. per gallon, £6 3s. 9d. The garage rent is 10s. 6d. per week so that, for the time being, the outgoings can be assessed as £6 3s. 9d. plus 10s. 6d., making a total of only £6 14s. 3d. The haulier will need some money for himself and it may be as well to assume that he takes the full amount that I have debited as the driver's wages, namely £6 16s.
His earnings are presumed to be the minimum amount ;et down in the Tables, £42 per week, and his expenditure on essentials has been assessed at £13 10s. 3d. That is all
that need be considered at the moment. The balance, £28 10s. appears to be profit, which is a misapprehension. That mistake comes of forgetting that there are several other items of expense. They are bound to come along a little later and some of them are quite large. They can be regarded only as postponed. The haulier should take care to make provision against the time when these other items call for attention. He must bear in mind that, at a not far distant date, he will have to buy some tyres, and tyres today are expensive. He must make provision, also, for future expenditure' on those maintenance jobs which he cannot do himself, and especially depreciation.
Depreciation is best regarded as the amount which the haulier should put on one side to provide for the purchase of a new vehicle when his first one wears out. There must be provision for the next quarter's licence and, at the end of his year, for renewal of his insurance policy. It is for the foregoing reasons that I have referred to a reserve fund and before going any farther I must make some calculations as to what that reserve fund must be, and, especially how it may be used to help with the payment of the instalments as and when they become due. It is comprised of savings towards the purchase of oil, tyres, a new vehicle and the expenditure on maintenance at the above rates.
Reserve for Taxation
With a vehicle running 600 miles per week, the amounts which should be set aside are as follows: lubricants, 600 times 0.18d. which is 9s.; tyres, 600 times 1.80d., £4 10s.; maintenance, at 0.9d. per mile, equivalent to £2 5s. per week; and finally depreciation, the last item of the running costs, 600 times 2.7Id., making £6 15s. 6d. The total of all these is £13 I9s. 6d. There must also be provision in these reserves for taxation at 14s. per week, and for the insurance premium at 17s per week. Add these sums to the £13 19s. 6d. and the total becomes £15 10s. 6d. per week.
That amount of money should be set aside out of each week's earnings, and that, plus £13 10s. 3d. which I have already shown as having to be spent each week, provides for all that should ever be needed in the way of expenditure. The total is £29 Os. 9d. The minimum earnings are supposed to be £42 per week so that the gross profit per week is £13. In describing that as gross profit. I am leaving room for consideration of yet another series of expenses, usually referred to as establishment costs. In the beginning, the operator will be to a certain extent in the dark as to the full meaning of this term, but should, in the first place make provision for that expenditure at the rate of £3 per week. That makes his total weekly expenditure, actual plus provisional, to be £32 per week to the nearest pound. The net profit is now down to £10 per week.
However, the hire-purchase instalments are £68 per month, say £17 per week. If I add that to the weekly cost I get £49 compared with a total revenue of £42 per week. That is to say the revenue is £7 less than the expenditure. But £15 10s. 6d. of the expenditure is not an immediate payment. • What I suggest is that the hire-purchase payments should be met in this way.
'The instalments of £17 per week can be paid for out of the fund. First take the £10 profit and put that much towards the £17, leaving £7 still to come. That may be taken from the reserve fund, making a note of the loan. In one month, for example, there should be £40 available from profit which is £28 short of what must be paid.
At this time, the reserve fund, if it has been correctly dealt with, will be £62 2s. When the deduction of the £28 is made, there will' still be £34 2s. left. That sum must not be regarded as profit. IL can be legitimately drawn upon only for expenditure on oil, maintenance, depreciation, licence and insurance.
This state of affairs will continue for 18 months, when the payments will finish. What is more, the time will have come when the operator may draw some real profit out of his business. During that 18 months, however, the fund will have grown, having its ups and downs according to the frequency and extent of the legitimate drawings. It is necessary for the operator tc:1 keep a note of any moneys subtracted from the fund, firsf, when some of it is used for the purpose for which it is provided and second as to the amounts borrowed from it to pay for the instalments.
Net Profits into Fund
The haulier must then make another check. First he must reckon what the fund would have been if there had been no withdrawals on account of the payments. He will then know that the fund is £126 short, 18 times 17. He will from that time pay that amount from his legitimate profits: it would be a good thing if he paid the whole of that deficit by ploughing into the fund all of his weekly net profit. It would take only 13 weeks and by that time his reserve fund would be used only on account of the operating costs of his vehicle.
I should conclude by pointing out that the payment of hire-purchase instalments out of this fund is only of secondary importance and should cease in 18 months. The. real value of the procedure involved is that it demonstrates to the haulier that his weekly revenue is not all profit: there must be set aside after deduction from his weekly takings a matter of £15 10s. on account of future expenses and that money, however it may be recorded or saved, is not to be used for any purpose other than that laid down in this article.
Once that is fully realized, the haulier will not be anything like so ready to cut his rates so severely as he would had he not been aware of the significance of the payments into the fund. S.T.R.