COSTS THAT COUNT 00
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by David Lowe, MInstTA. AMBIM
Next Tuesday March 21 is Budget Day. A day on which transport operators, along with everybody else, will be anxious to hear what the Chancellor has in store for them. Will there be bonuses, further impositions or a no-change policy? Whatever the outcome the budget will be a reminder of the importance of counting the cost of transport operation, of constantly assessing the rate of inflation and of comparing costs with revenue.
'RANSPORT OPERATORS both large nd small will have found in recent years icreasing pressures upon them to know leir costs.
These pressures have materialized mainly rom four sources. One: as a result of illation which has been at such a rate that lost operators have had to critically amine their expenditure in comparison ith their earnings. Two: from having to istify, in some detail, the financial erformance of the business when seeking ipital loans from banks or finance houses. hree: from a similar need to justify to Istomers sound and detailed reasons for riposing rate increases. And Four — the lore recently applied pressure; a :quirement by some Licensing Authorities T operators' licence applicants to complete
additional questionnaire relating to their .ms for the financial monitoring of their 3erations.
Licensing Authorities have powers under re 1968 Transport Act to inquire for krticulars of the financial resources which T available to the 0-licence applicant. In -der to obtain such information answers to iestions on the following lines are being ought in these questionnaires:
What basis do you propose to use for dculating the operating costs of your ohicle?
What proportion of your operating osts do you anticipate should be allocated maintenance and tyres?
kre you satisfied that the rates obtainable r your service will cover the costs menmed in addition to the standing charges r the vehicle, ie wages, profits, depreciation, surance, etc?
lave you entered into any contract or rangement for the supply of your services agreed rates?
What is your anticipated annual mileage? :live a forecast of the way in which you ipect your business will develop."
These are questions taken from forms nt out by at least two LAs and they are pplemented by other questions relating to e funds available for maintaining vehicles, lere those funds are located and questions eking to ensure that applicants fully rpreciatc the financial liabilities they are rdertaking if licences are granted.
Such onerous questions demand studied
answers. It is a new departure for operators to be faced with a financial inquisition of this nature.
What must the operator do if and. when he becomes subject to such pressures? Must he employ consultants or accountants to prepare elaborate financial data? Must he invest in extra staff or expensive electronic computing machines, or both, to carry out a continual financial appraisal of his activities? I believe not.
Back of an envelope
A well-known transport economist recently said at a costing seminar in London that, in the case of the very small operator who had his finger on the pulse of all his business activities, he believes the man could calculate the costs in his head and write the answers on the back of an envelope. I agree with this. There is no need for elaborate systems, so long as costs are calculated reasonably accurately from time to time and the results recorded for reference, this is a sufficient measure of control.
Control is the vital word in costing vehicle operations; this is the purpose of calculating figures which represent expenditure on all the necessary activities associated with running vehicles. Only by using such figures as a means of control of operations do they assume any value. If they arc not used for this purpose the operator would have better spent the time obtaining them on some other more remunerative activity.
The operator must decide that cost figures would be of use and determine that controls, indicated by the results as being necessary, will be rigidly applied. This is important because many operators are known to avoid cost analysis because the results would confirm truths which they prefer not to know, for example that certain vehicles should not be operated or certain trafficks not carried. Then the questions remain how should costing be tackled, how deeply should such an analysis probe and how elaborate should the documentation be allowed to become?
Costing can be a simple exercise requiring very little time and effort, after the initial setting up of a system, using very little in the way of documentation but
nevertheless providing a rewarding insight into the financial aspects of vehicle performance, measures by which future operations can be judged and, most important, providing the operator with a means of control which he could not possibly acquire from other sources — a control of his operating expenditure.
Vehicle costing in its conventional form comprises four main elements: standing costs, establishment costs, running costs and a combination of these known as total operating costs.
There are two other elements which will receive particular attention later in the series. One is the margin of profit which the professional haulage contractor will need to add to his total operating cost and the other applies to own-account operators who are not seeking to operate at a profit but rather to provide a level of service which meets, so far as possible, customer requirements within acceptable cost limits. This may be termed a service value. However, before either of these are considered and before the professional haulier can begin to calculate the rates he intends to charge, the costs of operation must be known.
It is essential first to define the four elements mentioned.
Standing costs are those items of expenditure which relate to individual vehicles in the fleet and which have to be met whether the vehicle is working or standing idle.
Establishment costs are the costs relating to the functioning of the operation — the whole business in the case of hauliers or the transport, distribution or dispatch department in the case of own-account operators — which cannot be directly attributed to any individual vehicle but which have to be included in the operating expenditure of the fleet.
Running costs are those costs which are incurred only by the running of the vehicle. Total operating costs are a combination
of these cost elements reduced to either a cost per mile, per hour or per week — which represent the total expenditure relating to the ownership and operation of each individual vehicle.