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Tracing Losses of Profit

17th October 1952
Page 54
Page 57
Page 54, 17th October 1952 — Tracing Losses of Profit
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Which of the following most accurately describes the problem?

An Operator's Earnings can be Less than. he Estimates if he Makes no Provision for Occasional Idle Periods: The Full Year's Work Should be Averaged to Give a Weekl), Figure on which to Base Calculations THE publication of a new issue of "The Commercial Motor" Tables of Operating Costs gives rise to one or two problems in connection with the application of the data when assessing rates and charges. There is, for example, the case of the man who failed to appreciate that unless he allowed for the weeks in which his lucrative mileage was below average, he would not earn the annual profit he, expected. .

He wrote to me about the work he was doing with a 10-ton oiler. He was operating under a C licence, this vehicle being one of several in a fleet owned by a company with a main factory in Birmingham and a big distribution centre in London. It was one of the conditions of the operation of the fleet that its accounts should be separate, and the transport manager was expected to demonstrate that his department showed a profit commensurate with that of a road haulage contractor.

He said that, according to the Tables, a vehicle of this type, running 500 miles per week, should earn 2s. 21d. per mile. He was operating under schedules of rates which allowed him £1 10s. per ton from Birmingham to London, and £1 6s. per ton from London to Birmingham. That meant that with full loads in each direction his revenue was £28 for the round trip, actually 2s. 4d. per mile, that is 11d. per mile more than the Tables recommended. Notwithstanding these conditions, he said that he had found that for the whole of 1951 he made a net profit barely in excess of £200, hardly £4 per week, which he thought insufficient.

Establishment Costs

set out to discover what was the net profit provided for in the Tables, and in the course of making the investigation I wrote and asked him what he had reckoned as the expenditure on establishment costs. He replied that he was accustomed to debit £5 per week against this particular vehicle, as the total for the fleet worked out at 10s. per ton payload.

According to the figures in Table V of the Tables, the operating cost of a vehicle of this capacity, running 500 miles per week, amounted to Is. 8.06d. per mile. I ascertained, furthermore, that his total of operating costs was almost the same as that quoted in the Tables.

A36 Deducting is. 8.06d. from the 2s. 21d. recommended as a haulier's charge per mile for a vehicle of this type running this mileage, gave me 6.69d. as the gross prof!, per mile, that was £13 7s. 7d. per week. Deducting establishment costs of £5 per week from that amount, there was left £8 7s. 7d. as the net profit per week.

In his next letter he corrected my figure of 2s. ad. per mile and reminded me that he had already informed me that he was actually earning 2s. 4d. per mile, in which case the gross mirgin of profit should be 7.94d. per mile or £15 16s. 9d. per week, and if the establishment cost of £5 per week be subtracted from that there was still a net profit of £10 16s. 9d.

Where Did £320 Go?

He insisted that his operating costs were, with the exception of one item, the same as those quoted in the Tables. That one item was insurance, which he said cost him £79 6s. per annum, or 30s. 6d. per week, as against 13s. 6d. quoted. The difference was 17s. per week. That amount must be deducted from the 'figure of his net profit, £10 16s. 9d., leaving in round figures £10 per week or £520 per annum. He stated that for the year 1951 his net profit worked out at only £200 and the question arose as to what happened to the other £320.

It occurred to me to ask whether the vehicle-actually ran 480 miles every week of the year. The answer, I found on investigation, was "No." The total mileage for 1951 was only 20,285. I was informed that there were occasional weeks when the vehicle did only one journey instead of two, and there were times when the London-Birmingham traffic was nil. Clearly, that was what affected the results.

In the ordinary way, the total expenditure was £45 19s. 6d. per week when running the full 480 miles. Now, in a week when only half the mileage was run the standing charges were unaffected. They were still £13 3s. 8d. (see the Tables) and 17s. a week for extra insurance, making £14 Os. 8d. Add £5 per week for establishment costs, and we get £19 Os. 8d. fixed charges, unaffected by the weekly mileage.

During the week, the vehicle ran only 240 miles at a cost of 13.75d. per mile, £13 15s. The total expenditure that week was therefore £32 15s. 8d. The revenue, calculated on the same basis as before, namely, 30s. per ton in one direction and 26s. in the other, was £28, thus making up a direct loss of £4 15s. 8d.

A closer examination of the figures for mileage showed there were 15 weeks in which only one trip was made in 1951. The net loss was therefore 15 times £405s, 8d., which, to the nearest shilling, was £71 15s. That is not all; for we have to find what has become of £3,20, the difference between the net profit of £520, assuming a full week's work every year, and the actual figure of £200, which was all the operator could find.

There is still this to be taken into consideration: in a full week, a profit of £10 was earned, and as there were 15 weeks when only one trip was made, that means that a further £150 must be added to our figures for loss of earnings. The total thus far, in round figures, is £220. The balance of £100 is because sometimes there was only one-way loading.

Having got to the root of this loss of profits, the next thing to do is to provide against such loss in the future and yet be able to apply the Tables in a logical rripner. It is not difficult, if it be borne in mind that the figures for miles per week quoted in the Tables are presumed to be the average throughout the year, not forgetting those weeks in which the distance is diminished.

In this case, the vehicle covered only 20,000 miles in the year, which is barely 400 miles per week. The figures for the charge per mile from the Tables which apply to 400 miles per week should be taken. That means that the charge per mile must be at least 2s. 5id or, say, 2s. 6d.

Machinery Transport

For a second example of use of the Tables I shall consider a pre-nationalization problem, one of the type which will come back when denationalization has been effected. It concerned an operator who was running a small fleet of oil-engined 7-8-tonners on the transport of machinery. He had been charging on the basis of time and mileage, but had been asked to quote a fiat rate per mile and, as his lead mileage per job varied from 20-250, he could see that that was not going to be easy.

I gathered:from his letter that full loads were usual in one direction only; back loads were few. Part of the difficulty of assessing a flat rate was because the customer was aware that back loads were sometimes available and therefore expected to derive some benefit.

The average mileage per week throughout the year was stated to be 500. Referring to the Tables, the appropriate rate per mile was seen to be Is. Hid. per mile run, or 3s. 5id. per mile lead. That figure, however, could be correct only so long as the mileage in one week did not vary greatly from the average of 500. That condition did not apply: in some weeks the vehicle covered distances in excess of 700 miles and other times only 200 miles. It appeared that a low mileage often arose from terminal delays which often involved 4 hours waiting per trip. If the Tables be applied, then for a 200-mile week the charge per mile run should be 2s. 11141, or 5s. 101d, per lead mile. On the other hand, the corresponding figures for a 700-mile week were Is. 6d. and 3s. Suppose the average rate of Is. 8fd. per mile run were to be applied, is there likely to be a heavy loss on the 200-mile week and, if so, to what extent is that loss offset by an extra profit earned in a 700-mile week?

Assuming that my haulier friend has come to terms wiih his customer and has quoted 3s. 51d. per mile lead, a 200-mile week will bring in a revenue of £17 5s. 10d. Actually, considering this 200 miles without any regard to the fact that the average weekly mileage is 500, the rate should be 2s. 111d. per mile run, bringing in £29 7s. 6d. •

Proper Balance

A 700-mile week at the flat rate will earn £60 10s. 5d. At the appropriate rate of Is. 6d. per mile run (taken from the Tables), the income would be £52 10s. There is then in these big mileage weeks an extra profit of £8 Os. 5d. If a proper balance is to be achieved, there must be at least three 700-mile weeks for every two 200-mile weeks. At the same time, it should be appreciated that if the 500 miles per week quoted as the average be correct, the deficiency on the 200-mile week and the bonuses on the 700-mile weeks will automatically even out and a fair profit will be earned.

The question of demurrage, payment for excessive terminal delays, is another point which is likely to arise. I have occasionally been asked if the hourly rate quoted under " Time and Mileage Charges" will suffice. That means that in the case of these 7-8-tonners, the demurrage charge should be 7s. 10d. per hour.

It is not enough to charge only that. One method of calculating demurrage, a method which gives the minimum rate, is to assess it on the basis of what the vehicle would earn if it were on the move. The other is to regard it as " demurrage" and inflate it so that it becomes in effect a penal or deterrent rate.

The first of these rates can be calculated from the information in the Tables. Begin with the figure already mentioned, 7s. 10d. per hour. To that must be added some provision for earnings on the mileage the vehicle could reasonably be expected to cover had it not been detained. Assess it on the basis of an average speed of 10 m.p.h.

Referring to the time and mileage charges in the Tables under the heading" 7-8 tons," read Is. Id. per mile. Not all that, however, is chargeable. The running costs per mile must be deducted from that. On the basis of a 500-mile week the amount is 10.34d. Subtract that from Is. Id. leaving 2.66d., and 10 times that is 2s. 2.6d. Add that to 7s. 10d. and the total is roughly 10s. per hour. If it be decided to charge the penal figure, it would be reasonable to take double the amount just calculated, that is to say £1 per hour. S.T.R.

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Locations: Birmingham, London

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