PROBLEMS OF THE HAULIER AND CARRIER.
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A New Reader Finds a New Name for what We Have Been Pleased for so Many Years to Call "Depreciation."
MY letter bag is distinct and incontrovertible evidence of the fact that the number of readers of The Commercial Motor is ever growing. Hardly a week passes but I get an enquiry which is obviously from a new reader, one who has not Seen our previous articles on cost of operation and who asks questions accordingly. In the ordinary way such queries are answered directly by post, and the regular reader knows nothing of them. Now and again, however, we —my readers and I-.--get that benefit which nearly always comes from an infusion of new blood ; we get a new point of view, Something is brought to our notice which has not occurred to BB before and, in such cases, it is nearly always worth while to discuss the matter in these columns so that others holding, .perhaps, the same unusual view, but not having yet reached the stage of communicating with me on the subjdet, may be helped.
. The Need for a Sinking Fund.
Such an enquiry has come to hand this week. A haulier wants' to know if he should make some provision for a sinking fund, that is to say, if he should lay by something regularly each week, month, or year; as the case may he, towards the purchase of a new vehicle when his present one reaches the stage of being ready for the scrap heap or the auction room. The amount, he thinks, ought to appear in our Tables of Operating Costs amongst the standing charges. I have written to him in reply, pointing out -that our item of depreciation is the equivalent of his sinking fund and that, in our opinion, the proper way to calculate depreciation, especially for the purpose he has in view, is on the basis of the mileage run. The amount which appears in our Tables under the heading of " depreciation " is the amount which should be set aside for each mile run towards the purchase of a new vehicle when the present one is finished.
Now, the fact that the amount set .down in our Tables of cost for depreciation is something which ought to be set apart and put by towards the provision of a new machine has been emphasized in these columns again and again. I am, therefore, justified in coming to the conclusion that this correspondent is a new reader if not of The Commercial Motor then of this page, and I am strongly inclined to the view that he must be a new reader altogether, for this page is not often skipped. The interesting point, however, is that he suggests the provision of a sinking fund, notwithstanding that he fins studied the Tables and, presumably, noted the figure which appears therein for depreciation: Clearly, therefore, he does not know what depreciation is and how it should be interpreted.
A Fundamental Difficulty.
This difficulty, I might almost say, is a fundamental one. To imderstand the Tables should not be difficult, but they must be understood in detail as well as in toto, if the reader is going to be able to make efficient use of them.
The essential thing is to differentiate between expenses which are more or less " current " and those B29 which are periodic, and again, of the latter, those which occur at reasonably short periods and those which are only experienced rarely. The division of the Tables into running costs and standing charges is not sufficient to that end. It has, indeed, very little to do with the matter, for some of the earliest and most prominent items of expense, those which must seem to be very "current," are included in the standing charges, whilst the running costs embody items not recurrent for upwards of five years.
When a man buys a motor vehicle there are two Items of expense which have to be met Immediately. They are insurance and tax. Both of these, it should be noted, are standing charges. If he is not going to drive the machine himself, he has next to think of the wages he will pay his driver—still an item of standing • charges. He may have to find somewhere to keep the vehicle and, if he has, then he will have to pay rent for whatever facilities he can discover and that expense also is a standing charge. Of these four items, two, wages and garage rent, recur in the majority of cases each week.
Then he has to buy petrol and oil, and he has to keep en buying petrol and oil all the time the vehicle is running, so that there, again, are two items—this time amongst the running costs— which come readily to mind when the cost of operation is being discussed. We are still left with four items of expense, four things which figure in our Tables, but concerning which a new owner knows little. One amongst standing charges is designated " interest " and refers to the interest on the first cost of the vehicle. This • Is a • thing which is forgotten altogether by most owners; even very experienced users of commercial motor vehicles have confessed to having overlooked this when making their calculations of cost.
Of the four, however, that relating to tyres is the one which is least likely to be overlooked, although there again the importance which it has in the eyes of a user will depend very largely upon the mileage which his vehicles are doing. A bus owner, for example, engaged on town services and with vehicles covering 5,000 or 6,000 miles a month, sometimes even more will find he will have to think of buying new sets of tyres about every three months, so that he will not overlook that item of cost. On the other hand, there are those, such as, for example, this particular Inquirer, whose vehicles only do 100 miles a..week ; they may not need new tyres until nearly a couple of years have elapsed from the time when the vehicle was purchased.
Then there is maintenance: that, too, is an -item which looms more or less prominently according to whether the mileage he great or small.
The four items of expense which recur at more or less lengthy periods are, in the order of the frequency of their appearance: tyres and maintenance—bracketed -equal--depreciation and interest on first cost. With the first two I have already dealt. The last one never appears as a positive item of expense. It is a loss, the loss of the interest which would have been earned by the money spent in the purchase of the vehicle had it been kept in the bank or put to some other remunerative purpose. We are, therefore, left with depreciation. Depreciation is, to all intents and purposes, the measure of a sinking fund. It indicates in pence per mile the loss in value of the vehicle to which the accounts refer. In our Tables, it is calculated, in the majority of cases, on the assumption that the vehicle will have a useful life of 150,000 miles, This is reasonable, in view of the fact that the average life of a motor vehicle in this country is in the neighbourhood of seven years. The average mileage which is run by a commercial vehicle, at least one in regular use, amounts to 20,000 a year. At that rate 150,000 miles is equivalent to a life of 71 years.
Let us take, for example, the case of a pneumatictyred 4-ton lorry on which is mounted a body costing £100, and of which the chassis Will have cost £800.
The pneuMatte tyres (38 in. by 7 in. being the usual size) are worth £100, and that must be deducted from the cost of the chassis In arriving at a figure on which to base depreciation, and the
• net cost for this purpose is MOO, plus £100 for the body, less £100 for tyres, which is MOO net. . Taking a• life of 150,000 mile's, it is easy to calculate that the figure for depreciation must be 1.28d. Take as another, example a sixtonner, chassis price £925 and fitted with bodywork costing £125, total £1,050. This will have pneumatic tyres 40-in. by 8-in., the list price of which is £140, so that in this case the net price on which we must base our calculation for depreciation is £910. Dividing that by 150,000 we get 1.46d. as the depreciation per mile. These are the amounts which must be set apart per mile and put by towards the purchase of a new machine.
• Depreciation as a Sinking Fund.
Obviously a man cannot put his hand in his pocket and take out 1.28d. every time he covers a mile and put that in a money box towards a new vehicle. It is what is called a book charge and he should earmark the corresponding amount in his banking account to be kept for that one purpose—the provision for replacement of his rolling stock. In the case of one four-ton lorry corresponding in its cost to the above specification and covering 100 miles a week, this depreciation would amount to £26 13s. 4d. per year (reckoning 50 weeks to the year) but, in the case of the same sized vehicle doing what I am pleased to call an average annual mileage of 20,000, the amount to be set aside for depreciation will be £106 13s. 4d. The corresponding amounts for the six-tonner are £30 8s. 4d. for 100 miles per week and £121 13s. 4d. for 20,000 miles per year. S.T.R.