FINANCIAL WIS )1\4 FOR THE SMALL HAULIER
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Solving the Problems of the Carrier The Difference is Not Very Great Between Profit and Loss for the Small Haulier. Factors Associated with Hire Purchase Which Call for Careful Consideration AMONGST problems which have been put up to me for solution, during recent weeks, the following question appeared more than once :—What return ought a haulage business to expect on the capital invested in it? In other words, what is the percentage annual profit that a small haulage business should earn?
In dealing with potential profits, and with what I regard as reasonable profits, in a haulage business, I have always used as a basis of calculation the total expenditure (that is to say, operating costs plus overheads) and arrived at a figure for profit on that total as a basis. I have usually taken as a minimum 15 per cent., and as a reasonable figure 20 per cent., but have appreciated that upwards of 25 per cent. can be obtained in well-organized and efficiently run concerns. Perhaps I ought to add that there is one other thing necessary and that is that the operator must have opportunities to develop his business and must have had the good luck, if I may fairly use the term, to handle traffic which does show more than the minimum profit.
Arriving at a Figure for Operator's Revenue.
Incidentally, I have found that a reasonable approximation to what the operator's revenue must be, in order that there may be some prospect of his earning the minimum percentage of those quoted above, can be arrived at by adding 331 per cent. to the total operating costs of his vehicle. For this method to be of any use, those operating costs must be inclusive : there must be full provision for maintenance and depreciation as well as the most easily assessable items of cost.
The foregoing, however, is not an answer to the type of question which I am considering. It is not difficult to appreciate that the class of work, the rates obtained, and especially the annual mileage covered in the conveyance of goods or passengers at a profit, might make a tremendous difference to the percentage on the capital invested, That makes it almost impossible to give a reasonable answer to the first query that arises in considering the subject—namely, what is a fair expectation of the return on capital invested in a haulage business?
Reference to published statistics shows that from B8 six per cent, to eight per cent. is usual. Incidentally, this figure is significant if compared with the somewhat optimistic expectations disclosed by those who are proposing to invest large sums in the purchase of a haulage business.
A particular case which came before my notice recently related to a business in which £100,000 was invested. One of the directors was telling' me that the net profit for the year just closed was £6,000, that is to say, at the rate of six per cent. He was very pleased and no doubt some of his satisfaction.. arose from the fact that he and his fellow directors had all drawn big salaries from the business before that assessment of net profit was made.
The Small Haulier's Percentage of Net Profit.
The same percentage of net profit might not be anything like so satisfactory in the case of a smaller operator. Take the case of a business in which four vehicles are employed. Assume that it is a wellestablished one, with ample goodwill, carrying for such a number and variety of customers as will ensure that the business is likely to continue to be prosperous and to maintain that goodwill.
Its capital value, if we exclude anything invested in buildings (and it is appropriate for the purposesof this calculation that we do so) is approximately £3,000. Let us take it that the vehicles customarily carry 4-ton to 5-ton loads and that they average, throughout the year, 100,000 miles between them.
The total operating costs, according to The Commercial Motor Tables of Operating Costs, should be approximately £2,625. Taking 33k per cent. to provide for overheads and net profit, we have £875. Not less than half of that, and almost certainly more than half, must be deducted on account of overheads. If I. take .£475 on that account, there is left £400 per annum net profit, which is at the rate of 13i per cent. of the capital invested.
Now the point to note here is that whilst the large operator may conceivably be content with six per cent., since it brings him in an income of £0,000 per annum and is probably a better return than he could obtain it he invested his money elsewhere the small operator is obviously not in the way of rapidly becoming a millionaire, although he is earning 13i per cent on his capital, for that is only £400 per annum.
The Capital Outlay of a Newcomer.
If we take the case of a newcomer—someone entering the haulage business and purchasing four new vehicles —the capital involved will not materially differ from that named above. Ha will probably have to spend at least £2,000 upon the vehicles and incidental equipment and he will need the best part of another £1,000 to tide him over the initial year or so, during which time he is building up goodwill.
Now consider the case of a man who acquires his vehicles under some scheme of hire purchase. Apart from all else, he is, in the case of four such vehicles as we have in mind, in the position of having to face, during the usual period of two years, a debit of £120 per annum, as interest on his hire-purchase transaction.
He will also most likely have to borrow £1,000 to keep him going while he is building up his business and on that he will probably be expected to pay at least five per cent. That is another £50 per annum. Out of his £400 net profit, therefore, he has £170 to pay out as interest, which leaves him a meagre £230.
Now the point is that operators of this kind are apt to look on the total amount represented by the cost of the vehicles and.the loan of £1,000,as capi-tal they have invested, and are inclined to regard 4230 per annum
as a scant return. They fail to appreciate the fact that they are, in reality, operating on someone else's capital and, not their own. The situation, as regards a man who buys his vehicles on hire purchase, is, however, much worse than is apparent from the above figures. At the very least, his monthly payments will be at the rate of £18 per vehicle. It is more than likely that he will acquire them one 5t a time, at intervals, and must therefore continuously be in the position of having to find £38 per month for these hire-purchase payments.
Beforethe has finished paying for his fourth vehicle, the first one is, in all probability, due for replacement and he must start again. This process is liable to continue indefinitely. And small wonder that it should be so. Thirty-six pounds per month is £532 per annum, which is more, by as much as £132, than the probable net profit.
The True Picture of 1-fire-purchase.
In order, therefore, to pay his expenditure in overheads, he must draw upon his depreciation fund to the extent of that sum each year, so that he is never in a position to buy new vehicles out of that fund and never in a position to earn a real net profit.
That is a true picture of hire purchase in its relation to the small haulier. It is not put forward in any way as deprecating the principle of hire purchase, but principally as indicating how essential it is that the haulier who is going to succeed in business should make a determined effort to drop the practice of purchasing his vehicles in that way. IT he is to do that he must operate at rates which will show him a revenue, not as set out in Tilt Commerriol Motor Tables of Operating Costs, but in EXECS'S thereof.