Planning for Profit ,
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Prudent Use of CTedit
Careful Estimation of Subsequent Operating Costs is an Essential Preliminary to Successful Hire Purchase of Commercial Vehicles•
IN this series a fortnight ago the use of credit finance facilities as applied to transport was discussed. Purchase of railway wagons by private owners in this manner was undertaken a century ago and today increasing use is being made of such facilities.
The latest available statistics show that in August, 5,106 new vans and 1,026 other goods vehicles were obtained on hirepurchase. This compares with the corresponding figures of 3,300 and 970 in August, 1960. For the first eight months of this year, ending August 31, 48,906 new vans and 10,099 other goods vehicles were purchased in this manner, as were also 686 passenger vehicles. Inclusive of both new and used commercial vehicles, a total of 155,490 were bought on hire.purchase during the same period.
As with any other service or facility, hire-purchase can be wrongly. used. But such instances should not be allowed to discount the known advantages when this facility is rightly applied. In these days of frequent changes in bank and other rates of interest, it is a valuable assurance to an operator to know that once a hire-purchase contract has been agreed, the terms, including the interest rates, cannot he altered, even though other rates of interest may be raised during that period. In addition to providing the opportunity to acquire. vehicles without first having the capital resources to purchase outright, even where such do exist, it might be found more convenient to employ them for other and more profitable purposes. Also, in addition to having the reassurance of stable interest rates, the purchaser has the knowledge that whatever change may take place in the national economy during the period of the hire-purchase agreement, he cannot be asked to pay off the whole . of the balance outstanding at short notice. This situation could, however, arise under conditions such as the recent credit squeeze if money had been borrowed for the same purpose from sources other than the finance houses.
IN giving guidance on the wise use of hire purchase, particularly in its employment by industry or commerce, the finance houses themselves give the following advice. The facility should generally be applied to goods which can be readily identified, as would be the case with a commercial vehicle. Moreover any goods or equipment purchased in this manner should have a useful life greater than the period of the hirepurchase agreement.
Similarly, the market value of a vehicle so purchased should he greater than the amount currently owed under such an agreement. A pertinent point, with direct bearing on the division of operating costs as between immediate and deferred expenditure, is that a vehicle so acquired should have a highearning potential from the outset, so that it can earn sufficient to pay. off the .hire-purchase debt over the period of 'the
agreement. .
Following the Chancellor's "Little Budget" announced on July 25, the Bank Rate was raised from 5 per cent. to 7 per cent, after which there followed a general increase in hirepurchase rates as from August 14. Briefly it was recommended by the Finance Houses Association that _whilst the legal minimum requirement remained at 20 per cent:, actual deposits should be at least 25 per eerie on new vehicles and those up to three years old, and 33.A.: per cent. over that age. Similarly, the recommended maximum interest charges on the remaining balance were raised to 10 per cent. for new vehicles, 11 per cent. up to three years old and 13 per cent: over that age. These rates; however, are the recommended maxima and the actual rateat _present -being charged by some large finance houses is 81. per cent. on loans on new vehicles and l0 per cent. on -used vehicles up to three years old. As an example of the Manner, in which the likely operating costs of a proposed new vehicle should be estimated and then assessed alongside 'corresponding hire-purchase commitments. give the following calculations. The vehicle to be used is a rigid 5-ton platform vehicle, fitted with an oil engine.This has been chosen as the type of vehicle with which a newcomer might well enter into haulage with the assistance of hire
purchase facilities.
Taking an average figure for several makes of vehicle in this range, the initial outlay will be reckoned at £1,316. The unladen weight is estimated to be 2 tons 17 cwt., with a resulting annual licence duty of £42. Assuming a 50-week year, so allowing for two weeks when the vehicle may be off the road for major overhaul or driver's holidays, the weekly standing cost in respect of licences becomes 17s. 8d., inclusive of a small addition on account of the carrier's licence fee.
Although it is appreciated that in this particular instance the driver may be self-employed, it will be assumed that the total cost of wages. inclusive of insurance contributions, amounts to £9 14s. 10d. a week. This is based on the minimum remuneration payable to a driver based in a Grade I area as defined by the Road Haulage Wages Regulations R.H.(70). These regulations, incidentally, still apply although the new proposals R.H.(71) are under review.
R. ENT and rates in respect of garaging the vehicle are nominally reckoned to cost Ils. 10d. a week, whilst comprehensive insurance cover for the vehicle incurs an annual premium of £102 12s. This is equivalent to 1.:2 Is. Id. a week, whilst interest charged at a nominal rate of 5 per cent, on the initial outlay of £1,316, adds £1 6s. 4d. a week. This results in a total of £14 Ils. 9d. a week for the five items of standing costs. Reckoning 600 miles a week as a fair average for this type of vehicle, the standing cost per mile would then be 5.83d.
Assuming fuel oil were purchased in bulk at 4s. lid. a gallon (which amount includes the recent tax addition of 3d. a gallon. following the Chancellor's "Little Budget") and a rate of consumption of .18 m.p.g: were achieved, the fuel cost per mile would be 2.76d. Lubricants are reckoned to cost 0.24d. and tyres 1.26d. per mile. This latter figure is based on a cost per set of £158 and an estimated mileage life of 30,000.
Maintenance inclusive of washing and servicing is calculated
to cast 2.10d. and depreciation 1.64d. a mile. This is on the assumption of an estimated vehicle life of 150,000 miles. In order to obtain the amount to be written off, the equivalent cost of the original set of tyrcs is first deducted from the initial cost of the vehicle,, followed by a further deduction of the amount reckoned as the ultimate residual value-10 per cent.
in this instance.
The total 'for these •fiVe items of running costs is thus 8.00d. which, when added to the standing cost, gives a total operating cost of 13.83d: a ladle.' On the basis of the agreed average weekly mileage-of. 600, the corresponding running costs per week would be—Fuel 16 18s., lubricants 12s.. tyres £3 3s., maintenance £5 .5s., and , depreciation £4 2s., thus making 'the total '20. The total Operating cost for the week would then be'
£34 Its. 9d.• . • • . •
Although the total cost of operating a vehicle can be divided into the 10 items just enumerated, it will be appreciated that the actual expenditure will not be incurred simultaneously in respect of all the items, or even consistently on any one item. As a convenient generalization; and as -an alternative to the division of expenditure into _standing .and running costs,' this 'can also be divided into current and periodic expenditure.
Dealing first with the standing costs in this manner, licences would normally be dealt with annually so that the equivalent cost of 17s. Sel. a week already calculated would not have to be met for some considerable time once a new vehicle had been put on the road. Wages, however, would have to be paid currently and it will be assumed in this instance that garage rent is similarly dealt with. Insurance premiums, however, will be in the same category as licences, whilst it will be assumed that interest charges will be in the same category. As a result, the total standing cost of £14 Ils. 9d. can be divided into current expenditure of £10 6s. 8d. a week, whilst the balance, equivalent to £4 5s. Id„ would have to be met at some later date, possibly annually.
Similarly, running costs can also be separated in this manner. Both fuel and lubricants would involve immediate expenditure. With an increasing mileage life being obtained from modern tyres, however, it might be' some considerable time before any expenditure would be normally incurred on this account; and this item will be allocated accordingly. For the purpose of operating costs, the term " maintenance" is used in a comprehensive sense to include washing. servicing and subsequent major repairs. As a result some expenditure under the heading of maintenance will be incurred currently and will be here nominally reckoned at £1 a week, the balance—equivalent to £4 5s. a week—being deemed a periodic cost.
The cost of. depreciation will obviously also be a periodic expenditure. As a result,. £8 10s. of 'running costs can be considered to be current expenditure, giving a total of £18 16s. 8d, as that proportion of the operating cost which has to be met weekly. The balance of £15 15s. Id. (equivalent to 45.55 per cent.) will be the expenditure incurred at a later date.
Assuming this 5-tonner was acquired today on hire purchase at current rates of interest charges, an initial deposit of 25 per cent, would leave a balance of approximately £987 to be paid off, At a rate of 8-1 per cent. as applicable to new vehicles, the interest charge per year would be £84 (to the nearest pound). If, in the first instance, this balance were paid off in one year, the equivalent weekly payment (still on the basis of a 50-week year) would be approximately £21 8s.
Alternatively, if the agreement was for a period of two years a second £84 interest charge per year would be incurred, making the balance to he paid off £1,155. This amount, however, would now be divided by 100, giving an equivalent weekly payment of approximately £11 1 ls. It will be noted that .the estimated proportion of operating costs on which actual expenditure will be deferred, namely £15 15s. Id., lies approximately mid-way between the two alternative weekly hirepurchase payments of £21 8s. and £11 Ils.
If it is fully appreciated by the operator that, although deferred, this proportion of operating cost will eventually have to be met, then this interim period can be prudently used to meet most if not all of _the hire-purchase payments. As said earlier, however, this presupposes that any equipment obtained for commercial use on hire purchase has a high earning potential, which in the case of a commercial vehicle means adequate profitable traffic. S.B.