Fallacious Profits
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of the One-man I laulier
The Case of an Operator Who Was Offered Work Involving the Purchase of a New Vehicle. Investigation Shows that He Has Been Making a Net Profit of 3s. a Week
IT is astonishing the number of operators who are unaware of the total cost of operating their vehicles. Many of 'them, even if they read " The Commercial Motor" Tables of Operating Costs, either fail to understand them or question their accuracy.
A one-vehicle haulier recently came to see rue. This man had been making a reasonable living carrying building materials mostly for one concern, and an opportunity had arisen for him to do a little more work for the sante undertaking. The commission offered him, however, involved the purchase of a new vehicle, and made it necessary for him to quote a price to cover a year's contract.
He had worked out what he thought his price should be, and he came to me to check on it. I was able to persuade him that his price was wrong and that he would have to increase it or lose money on the job.
A Step at a Time
I found that the best way to convince him was to take the items of cost, one by one, and to ask him if my estimate of the amount of each particular item was right or wrong. Following this he had to agree that the price he had in mind was too low. In view of the criticism which I sometimes get regarding quotations, I suggest it might serve a useful purpose if I were to treat in detail with a somewhat similar case.
Another haulier had an offer of work for a five-ton lorry, which was to convey materials from Birmingham to Coventry. The distance was from 18 to 25 miles each way, according to the precise locality of the collecting and delivery points, and the price that he was offered was Os. per ton. I gathered that he expected to be able to make two roundtrips each day, five days per week. His weekly mileage would be approximately 400, and the net cost of operating his oil-engined vehicle, according to the Tables, would be £16 14s. per week. His revenue would be derived from the delivery of 50 tons of material at 6s. per ton, and would thus total £15 per week.
S.T.R. is Always Wrong !
If this haulier had visited me he would have begun by saying: "Surely there must be something wrong with your figures, because I know another man who is doing the work at that price."
I should have answered: "I do not think that there is any inaccuracy in my figures, and I feel sure that your competitor who is doing the work at the price is losing money. However, let us go into the matter and see."
We start with fuel, and I say to hint: "The figure for fuel consumption, in the Tables, is 1.01d. . That is at Is. 9d. per gallon, so that a mileage of just over 20 m.p.g. is assumed. Do you get more than 20 m.p.g with your five-tonner?"
It is probable that he will not know the answer. it is more than likely that he will imagine he is getting better results than that, and although I believe he is mistaken, I accept his word when he says: " Oh, I do better than that; I get 23 m.P.g., and now pay only Is. 8d. per gallon." " Very well," I say, "23 m.p.g. at Is. 8d. per gallon is 0.87d. for fuel. Now about oil. In the Tables there is 0.18d. per mile alloWed for that, which is equivalent to an average of something in the neighbourhood of 500 m.p.g."
He will probably agree to that as being reasonable.
"Regarding tyres, what mileage do you consider you cover on a set, shall I say 24,000 miles?"
He agrees that that is a fair figure.
"The price of a set is £105, which, at 24,000 miles per set, is equal to approximately Id. per mile. The figure in the Tables is 0.80d.; the difference probably arises, in part, from the fact that the cost of tyres has increased since the Tables were printed, but, if you like, we will keep to the 0.80d."
Here I get a surprise. " No," says the haulier, " I think the figure of Id. per mile is about right and we will agree on that."
Next we come to maintenance. "What do you think you spend in a year on your machine?" I ask.
"The vehicle could do with a thorough overhaul," he replies; " and from what I can gather, that is going to cost me about £80. Then, of course, I have bought a few parts during the 18 months I have been running the vehicle, and it is time, too, that it was repainted. Altogether, I suppose that, in 18 months, I shall have spent the best part of £110 on it."
'What mileage have you covered in that period?"
"There is 18,561 showing on the speedometer, and there was a month when it was disconnected; I suppose I did 1,000 miles in that time."
"That means about 20,000 in the 18 months. Your vehicle is rather a costly one to maintain, isn't it'? "
"I have been rather unfortunate With it, but those are the figures."
A Fair Average .
"Well, £110 spread over 20,000 miles will give 1.32d. per mile, which compares with the figure of 1.10d. per mile given in the Tables,s,and that is spread over the whole life 'of a vehicle. I think that-we ought to take it that in future you will spend less than 1.10d. per mile, so that your average will be just that amount."
He agrees to that, and I then go on. "There now :remains of the running cost only the depreciation. What did you pay for the vehicle when new?" He gives me a figure of £650.
"Having in mind from experience how long a vehicle of this type should last, I reckon on a life of 100,000 miles, To get the depreciation per mile We must first take from the £650 the cost of a set of tyres, say £100, and another £50 , as being the amount you are likely to get for the vehicle when you sell it. That leaves £500, and if we divide that by 100,000, the assumed life in miles, we get 1.20d. as the depreciation figure per mile. Have you any fault to find with that? "
'No, but I never thought of reckoning depreciation as part of the running cost."
"Well, what do you think? 1 he vehicle will not last for ever; it will have to be replaced, or else you will have to go out of business. If you continue to run at the rate of 20,000 miles per annum, 100,000 miles is equivalent to five years of life. I feel sure you will he glad to get rid of it by that time. Then, of course, the contract we are at present discussing may involve you in a bigger annual mileage than that, thus considerably reducing the life of the
vehicle if you reckon it in years. It is because of the effect which mileage has on the years of life of a machine that I prefer to reckon depreciation as a mileage charge rather than as a time charge. At least, you must agree that it is impossible to deny that the vehicle is depreciating all the time, and consideration must be given to that in your vehicle operating cost."
No further argument is raised about this point so I proceed.
"We have, as running costs only, 0.87d. per mile for fuel, 0.18d. for oil, 1.00d. for tyres, 1.10d, for maintenance, and 1.20d. for depreciation, a total of 4.35d., and you have not been able seriously to criticize any one of these items. You• are, therefore, in agreement with me that, sooner or later, every mile which you run with this vehicle is going to cost you 4.35d."
No Allowance for Running Light
" But," he counters, "you have not made any allowance for running light. Surely, the run back to Birmingham from Coventry, when I have delivered my load, will cost less per mile? "
1 did not ask you for your fuel consumption when loaded and when light; I simply wanted to know what it was generally, and when you told me it was 23 m.p.g. 1 took it that you meant 23 rit.p.g. day in and day out, light or loaded.The basis on. which all calculations of running costs have to be made is on averages."
"You now have ..to consider," I say, "what are called standing charges. These, are the items of expense which do not change in accordance with the mileage the vehicle runs. Take, for example, the annual licence. Do you pay fr. this in a lump sum, or do you pay quarterly?"
"This year I.paid in a lump suan—£30."
In the Tables, we are accustomed to reckon a year as being made up of 50 weeks. We know that no vehicle continuously operates for 52 weeks a year; the average working year is often less than 50 weeks. The cost of your licence is therefore equal to 12s. per week.
"Dealing with rent and rates, how much does it cost you to garage your vehicle? " I ask.
"I pay 5s. per week."
"And insurance?
" A comprehensive policy costs -me £35 per annum."
" That, I presume, is for the vehicle only, and does not cover the load ?"
"No Do you think I should insure the load ?"
Transit Insurance Not an Operating Cost "It all depends-upon the nature of the load and the terms under which you carry it for your customer. But, as it is not correct to include insurance of the load under vehicle operating cost, we will leave that out for the time being. You said, £35 was the amount of the premium; that is, 14s. per week.
"Next comes the interest on first cost. This is a difficult point, and not everyone is agreed that it should be included in a haulier's accounts. I think the best thing I can do is to see what it should be, and then note how its inclusion or exclusion affects our results.
"You said that you paid £650 for the vehicle. If you had invested that money elsewhere it would be bringing in, to-day, about 3 per cent, per annum. On £650 the interest would be £19 10s. per annum, or 8s. per week, approximately.
"Of course, if you put by every week, the amount of 1.20d. per mile which I have shown as being due for depreciation. you would save about £100 per annum, and the interest on that could be set against this interest on first cost, and your loss on that account would gradually diminish. (I dealt with this feature in last week's issue of "The Commercial Motor.") If you agreed to put this money away for depreciation, then about £12 10s. per annum would be the amount that must be set down in your operating cost as being•the interest on your initial outlay. On that basis the weekly amount would be 5s.
"We now have 12s. per week for licence. 5s. for rent and rates, 14s. for insurance, and 5s. for interest on first cost. The total is £1 16s. per week, but that is without any allowance for driver's wages."
"As I am going to drive the vehicle myself," says the haulier, "there will be no need to reckon anything for that." A36
"I presume that you, as driver, look upon your wages as being part of the legitimate profit ?"
"Yes,' was the reply, "of course I do."
"On that basis, and especially considering the contract that we are discussing, the result will be that your total profits will probably be less than a driver's wages. Are you agreeable to that ?"
"Yes, why not ?"
"The only point is that if you are satisfied with a driver's wage, why do you bother to go into business on your own account ?"
"I had not thought of it in that way."
"What you must do, if you are to conduct your business in a proper manner, is to pay yourself a wage as driver, and then look for a profit. At the least, you must agree that your venture is only just paying its way when it pays you a driver's wage. You are making no real profit. You may, with establishment expenses, be working at a loss."
"Establishment expenses, what do you mean by that '?"
"First of all, let us settle this question of the operating cost of the vehicle. I am going to include £5 16s. per week' as driver's wages. The other standing charges we have already agreed as being £1 16s. per week. The total of standing charges is therefore £7 12s. per week.
"Let us apply these figures of cost to the contract which you have in mind. It involves about 400 miles per week. and the revenue was to be £15.'
3s. Profit for a Week's Work
"Four hundred miles per week at 4.35d. per mile is £7 5s. Add to that £7 12s. for standing charges, and a total of £14 17s. for actual operating costs is reached. On that basis your net profit is 3soper week. It might as well be nothing.
"Suppose we take your own line of argument that your wages may be taken as part of your profit, and let us even go so far as to accept a suggestion, which is occasionally made, that the amount set aside for interest on first cost is profit. The amount assumed for wages is £5 16s., that for interest on first cost 5s. and, finally, there is this amount of 3s. for net profit. The gross total is £6 4s. per week. Just keep that in mind and we will now turn to considering establishment costs.
"Establishment costs are expenses which I have not already mentioned in our talk about vehicle operating cost.
"What do you spend apart from those items that we have discussed ?"
"Nothing. I did not know that I spent so much as that." "Then how do you obtain business."
"What do you mean by that ?"
"Well, how did you get this particular job? To start with, I notice that the contractor himself lives at Birmingham, whereas you reside in Coventry."
"I went to see him."
"How did you travel 2" " I took my lorry."
Out of Pocket at the Start "But your vehicle costs you nearly 41(1. per mile to run, apart from -standing charges, and the distance is between 45 and 50 miles, so that it cost you over 18s,, apart from the cost of keeping the vehicle. How are you going to make up for that? Moreover, did you go to see him without making an appointment."
"No, I first wrote to him, and not getting a reply, I'rang him up."
"Two-pence-halfpenny for a stamp, some stationery, and a trunk call to Birmingham. You have not got the job yet. I suppose it is more than likely that you will have to see him again before you do. Another 18s., another stamp and probably another trunk call. I daresay, too, that you had. a meal in Birmingham, so that it is fairly obvious that by the time you have received this contract, you have spent anything from £3 to £5 in preliminary expenses, or, in other words, establishment costs. Now, perhaps, you begin to see what I mean, and that is not even a quarter of the expenditure covered by the term. It is surprising how comparatively small and individually insignificant items when added together soon reach an amount which will reflect materially on gross receipts."
"Yes, I do, but I have already made up my mind that there is not enough in this particular job to make it worth my while to discuss it any longer." S.T.R.