Positive Use of Overhead Costs
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S. Buckley, ASSOC. INST. T. gives advice on Transport Problems THE problems arising from fleet expansion have been considered in this series recently. It has been demonstrated that whilst the owner driver may manage largely on verbal instructions and memory, an adequate recording system soon becomes essential as additional vehicles are added to the fleet.
Such records, as recently described, relate directly to the operation of vehicles and the movement of traffic carried by them. In the first instance they will record the journeys of individual vehicles, but there will also be need for fleet summaries to provide an overall picture both of the fleet's current activities and—of equal importance—any significant changes in the pattern of business.
At this same stage of expansion another problem is brought to light. Strictly speaking, it is not a new problem, but because of misunderstanding it may appear so. I refer to the subject of overhead or establishment costs.
As previously explained in this series the cost of operating a commercial vehicle can be conveniently separated into 10 items which themselves can be grouped into standing costs and running costs. Briefly, the five items of standing costs --licences, wages, rent and rates, insurance and interest— are incurred whether the vehicle is used or not. In contrast, the five items of running costs—fuel, lubricants, tyres, maintenance and depreciation—are, with some minor exceptions, directly proportional to the mileage run.
But although 10 items of expenditure are included, the total operating cost so obtained is limited to the use of a specific vehicle. In arriving at this amount—which, incidentally, can be expressed as cost per mile or per week —it is assumed that arrangements have already been made for the profitable employment of the vehicle and that operating cost per mile is realistically related to the gainful employment of the vehicle.
Make Proper Provision
Obviously, such gainful employment does not happen by accident, and proper provision, involving additional expenditure, has to be made to ensure vehicles do not stand idle. Moreover, it is a continuing expenditure. This is commonly referred to as overhead or establishment cost. Whilst operating costs could be said to be incurred in the running of a vehicle, overhead costs arise in the running of a transport business as a whole. For this reason, overhead costs cannot be directly related to specific vehicles, although ultimately some method of apportionment as between the differing vehicles has to be devised.
Unfortunately, in the initial stages of operation, whether as an owner driver or possibly with a small fleet of two or three vehicles, it is a commonly held fallacy that few, if any, overhead costs are then incurred. For example, a room in a haulier's private house, complete with heating, lighting, telephone and a minimum of office furniture, might be set aside for clerical purposes. It is common practice in such circumstances for the clerical work to be done in the evenings or at week-ends, either by the owner driver himself, or possibly some member of the family.
Many successful and well-established transport operators started on just such a basis, but I suggest that one of the reasons for their subsequent expansion was their early appreciation that the initial conditions—including continuous and unpaid managerial and clerical work at evenings and week-ends—could be accepted only as a temporary expedient. As soon as fleet expansion made such an arrangement impossible then obviously any administrative staff engaged to deal with the overflow of work would have to be paid at current rates.
It has been an unfortunate peculiarity of transport that more operators have seemingly been prepared to do two jobs—manager and driver—for little, if any, more than the wages of one. Moreover, in so doing they have undercut, if unwittingly, local transport rates in their area. In such circumstances it would seem to be more realistic to claim that overhead costs had been incurred but have not been met, rather than to say they do not exist. I said earlier that overhead costs can be considered an expenditure incurred in the running of a business as a whole, as distinct from the running of individual vehicles. Expanding a little on this definition, a substantial proportion of overhead costs could be said to be incurred in " selling" the business—that is the transport service provided.
Here again, as letters to this journal reveal, there is an unfortunate ignorance on the part of many would-be entrants to the transport .industry as to the importance of the commercial or selling side of the business. However useful initiative and competence in the driving and maintenance of vehicles may be, these qualities alone are not enough to ensure profitable operation of vehicles.
Commercial prudence and business acumen have always been essential ingredients of a successful undertaking. In transport in the immediate future they will be in even greater need following the repercussions of not only the reshaping of British Railways but also the reassessment and possible revision of the licensing system. At this stage few would wish to forecast just what form such repercussions will take. But what is amply clear is that it would be more than ever necessary for every road transport operator to be able to ascertain just what is or is not profitable traffic. Having done so he must be a sufficiently capable salesman to sell the right service to the right customer and moreover be sufficiently in touch with current events to anticipate any development likely to affect his business.
At this stage it is a worthwhile exercise to make a comprehensive assessment of such costs rather than accept them as isolated items of expenditure as and when they occur. Although some of the items, such as administrative salaries, may be high, the diversity and number of items which go to make up overhead costs are the significant factors of this section of expenditure.
Though the diversity and number of these items will vary with the size and type of operation, it is nevertheless helpful to formulate a probable list of such items, grouped in a logical pattern. Whilst expenditure may not actually be incurred under all the separate headings by every operator, the list of items will provide a check to ensure that all expenditure, however miscellaneous, has been included in the total amount. By their very infrequency some of these items of overhead costs may tend to be overlooked when a quick reassessment of an operator's total costs becomes necessary as the result of an urgent request for a quotation for new business. Unfortunately, once such an omission has occurred with a resulting underquotation it would be difficult—if not totally impracticable —for the operator to subsequently get his customer to accept a higher, though more accurate, rate.
Eight Headings It is suggested that a standard list of overhead costs could be conveniently grouped under eight headings. As stated earlier, however, both the range and number of items will obviously vary with the type and size of work undertaken. To give two examples which are to some extent opposite extremes, the organization necessary to secure and maintain long-term contracts for, say, bulk tankers, must obviously be totally different from that necessary when operating coach tours. Nevertheless, a suggested standard list of items does provide a starting point from which operators could formulate their own list.
Whatever the type of work undertaken the suggested headings for the first group—management—will apply to all cases, even if only one vehicle is operated, despite the fact that it may not be recognized as such.
Dependent on the size of the undertaking the first item in this group—salaries—will include not only the salary of the operator himself, assuming him to be the proprietor, but also any assistants he may have. Alternatively, the larger organization may include a board of management concerned primarily with long-term policy in addition to the actual managers who cope with day-to-day problems. Because of the very mobility of transport operation one or more cars will be essential in the carrying out of the duties of management, both as regards supervising the operation of vehicles and the canvassing of customers. Accordingly, the second item of cost in this management group will be car expenses.
Next week the remaining seven groups of overhead costs will be considered.