A Surprising Reason for Rate-cutting
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MY friend Mr. F. F. Fowler. chairman of the national rates committee of the Road Haulage Association. has circularized members in a letter which should have the widest possible publicity. He notes that it is reported that haulage rates, which are agreed and are in general operation, are in certain cases being cut and he points out that this, at the present time, can result only in harm to the industry as a whole.
He states that certain costs are still rising, so that there is no economic ground for claiming that the present rates could be reduced. in view of that, it seems to him that the only reason for cutting rates is the desire to abstract traffic from other operators. This is something which can never be justified and must result, inevitably, in a state of affairs where profits disappear.
Costs Overlooked in Quoting
1 have myself also had reports that rate-cutting is again becoming prevalent. To a certain extent the cause is that stated by Mr. Fowler, but it is also, in many cases, the result of lack of appreciation of the need for taking comprehensive operating costs into consideration before quoting for a job of haulage.
It may seem strange, after all these years, that such a condition of affairs should exist, but it appears to be due to the fact that during the war and since then, many operators have been operating on Government contracts at fixed rates which, whilst perhaps not altogether extravagant, nevertheless did,embody a minimum margin of profit.
Work of that description has, during the past year or so, been diminishing and these operators have reverted, in so far as their method of conducting their business is concerned, to the state in which-they were in the 1930s.
To put it bluntly, the majority of them is guessing at rates: It is possible that, in order to obtain some assistance in this guessing process, they are ascertaining what other operators are getting and optimistically assuming that they
can profitably work at a rate a little below that. , Alternatively, they may be accepting as true the statements made. by their prospective customers, that such and such rates have been quoted to them, modifying their own proposed charges accordingly.
It so happens that a case of this kind has come recently to my notice and I propose to deal with it in full, so that other operators similarly placed may perhaps be deterred from making the same mistakes.
The story begins nearly a year ago, when an operator whom I met in the Midlands said he was taking on a
contract for the haulage of cattle foods. He did not give me details at the time, otherwise j might perhaps have helped him to avoid the troubles with which he was eventually beset.
I met him again recently when he told me that he was very dissatisfied with the way things were going. He said that he started quite well and was making a fair profit for a time, but that had fallen off rather badly and he could not see the reason for it. I asked him to let me have some figures and eventually he produced the data which appear in Tables I and II, in which arc summarized his accounts for two quarters.
The figures relate to a 3-tonner on a contract-A licence and the first thing which struck me was that this operator had entered into a contract to carry cattle foods, etc., at an agreed rate of 6s. 6d. per ton without properly investigating the probable weekly tonnage and without making any provision in the contract for a minimum.
He was told, when he entered into the contract, that the tonnage was about 45 to 55 per week at that time of the year. What he was not told and what he apparently did not know, was that the market for this product drops considerably during the summer months. That is one of the several causes of his failure, although, as I shall show, it is not the most important one.
I do, however, wish to make that point at the start, as I have so often warned operators not to undertake contracts of this kind without making some stipulation either as to the minimum weekly tonnage or the total annual tonnage.
Search for Omissions Upon being presented with the figures in Tables I and II did as I recommend all operators to do, that is examine the headings so as to get some idea as to what is included and also to see if anything has been omitted.
The first and most obvious omission here is the figure for mileage. On raising that point, I was given to understand that the work was entirely short-distance haulage, being that of loading up the meal and cake at the contractor's warehouse and distributing it to farmers, nearly all of whom were within a 10-mile radius.
The haulier had never thought it worth while to keep any record of the mileage, but he told me that it approximated to 250 per week. If it be taken that the average journey is eight miles, that a load is 3 tons and that the average is from 16 to 18 loads per week, this figure for mileage appears to be approximately correct. There is a column for petrol and oil and their cost, and another for work done, the latter being recorded as total A33
tonnage. Then there is one for repairs and one for tyres. The most noticeable thing about these two columns is that the amounts entered are small and few. The next heading is "wages and insurance" and here tht first thing that I noticed was that whilst for the greater part of the time the amount quoted in this column was £5 or thereabouts, it dropped to £2 10s. in the last three weeks of the second quarter. I was told that when the operator found traffic was so scarce he put the driver to maintenance work in his repair shop so that his wage was not chargeable against the vehicle.
The next column shows the figures for receipts at the flat rate of 6s. 6d. per ton.
Now comes "Gross Profit." A brief examination of the figures shows that this sum is arrived at by deducting from the receipts the total of wtges, insurance, expenditure on petrol and oil, on repairs and on tyres. Obviously, there is a good deal to be accounted for under this heading before we arrive at the net profit, but we must naturally inquire into the next column, which is headed "Standing Charges and Depreciation." I had this explained to me and will therefore pass on the explanation just as I received it, reserving the right to criticize if necessary. What this operator calls standing charges comprise the tax, £33 10s. per annum; insurance, £30 10s. 6d.; garage rent, 5.22 10s.; depreciation, £100. The total is £186 10s. 6d., which is £3 Its. 9d. per week as set down. Deducting this £3 1 Is. 9d. from the gross profit gives the figure for net profit. This is set down in the last column.
Important Items Forgotten
There are some noticeable omissions from this schedule of costs and furthermore the provision made as regards two of them, repairs and tyres, is entirely inadequate. There is no allowance of any kind for– establishment costs or contingent expenses.
I was quickly able to demonstrate that if adequate provision were made for Maintenance and tyres his apparent profit, inadequate as it was, would be shown to be a substantial loss and that without taking any note of his establishment charges or contingent expenses.
Having checked his figures very quickly in this way, I said to him: "According to your figures you seem to have made quite a reasonable profit in the first quarter-144 on an expenditure of about £150—which is 30 per cent." "Yes," he said, "as a matter of fact I thought I was doing very nicely but in the second quarter, as you see," he continued, "I made a loss of £16, whereas my expenditure was still about £130."
"Quite," I said. "That, of course, is due to the initial mistake you made in entering into the contract without appreciating that there are slack periods in this particular traffic. And that would be bad enough if your figures were correct."
"What do you mean?" he asked. "They are all there." They are not all there," I said, "by any means."
' First of all let us go through your figures for repairs and tyres; what do they mean exactly?"
As regards repairs," he said, " the first item of 5s. was for a sparking plug. Then there was Is. 10d, for a side light bulb, then that £1 was for another set of plugs.
A34 was having trouble with plugs. I forget what the other thing was, the 8s.. 6d., but these amounts are all spent on repairs and maintenance."
" What are those two breakdowns which are mentioned?" I asked.
"The first was a cracked distributor head and I had to wait a day or two before I could get a new one."
" But," I said, "there is nothing in the repairs-column for that."
"Oh, that's all right," he said, "1 had it replaced under guarantee."
"That clears that up. And the second one?"
"That was dirt in the petrol tank," he said. "I had to send a man out to attend. to it."
"But where is the charge for this man's time?" I asked.
"He wasn't very long on it," he said, "and I didn't think It worth while to put anything down. There was no actual expense in the way of new parts wanted."
"But," I said, "it is a charge against the vehicle." "Yes, I suppose it is," he answered.
" What is going to happen in another few weeks when you will have to have a decoke?"
"I suppose I shall put something down for that." "And later on when you have a major overhaul?"
"it will all go down."
"But," I said, "you are making a loss now in part of the year. What sort of figures will you show when you really have to begin to pay for maintenance and tyres?"
That obviously left him without a reply. "Now look," I said, "your figures are quite inadequate. You have missed out some important items of cost and
I think I shall very easily be able to show you that not only are you not making a very meagre profit, but you are showing a loss."
" Let us get down to this question of maintenance," I said. " Presumably your vehicles are washed occasionally, and you have the brakes adjusted and odds and ends of that kind?"
"Yet, but the drivers do that in their own time, so that the cost of that work is included in wages."
"Very good," I said, "1 will accept that. but you will have repairs and tyres to pay for and you should make some allowance for it."
No Virtue in Anticipation ?
" But I can't see any point in putting down expenses before they are incurred. That statement of costs," he continued, referring to Tables 1 and 11,." shows what has been spent on this particular contract and what it has earned. Surely the difference between these two is profit."
" In one sense you are right and you may continue to take that attitude so long as you do not forget that repairs will have to be effected and tyres will have to be bought sometime in the near future. When that time comes there will be a big increase in your debits and a corresponding decrease in your profits. Indeed. I am going to show you that your so-called profits will prove to be a considerable loss, not only in the slack period of the year, but throughout."
"That will he all right so long as those periods do not come too frequently and I can offset that loss by profits such as those during the September quarter, so that I shall be earning a profit all the year."
"That is all very well, but one imperative thing in a haulier's account is that they should show him, at the beginning of the job, whether he is going to make a profit over a .prolonged period at the rates he is charging. You have no idea what your.repairs and tyres will cost you and without knowing or making some provision for it in your accounts you are likely to fail. Indeed, that is already the case as I shall show you.
"1 shall do that by telling you how much you ought to allow for maintenance and tyres. Maintenance, including repairs but leaving routine tasks for your driver, is likely to cost you, according to my figures, very nearly Id. per mile. I will call it 9/10d. Your tyres will ultimately cost you rather more than id. per mile. I will take it as Id. That is very nearly lid, per mile, for which there is no provision and which must, therefore, be deducted from your figures of cost. Let me begin by dealing with these two items," I said.
"There is no record of mileage, so I propose to assume that your vehicle does 10 m.p.g. Is that right?"
" I'm not sure," he said, " but I think it is about right."
"Very well then. In that case in the first week you did 280 miles. Now reckoning maintenance at 9/I0d. per mile means that you ought to put aside for future expenditurt on maintenance 21s. during that week. Also for tyres at Id. per mile, 1 Is. 8d."
Costs for Six Months
I proceeded to do that for him during the whole of the 26 weeks to which his figures, shown in Tables I and 11, refer, and so obtained the results set out in Table III, in which are given first of all the appropriate allowance for maintenance, then for tyres and then the total.
In the fifth column, I set down once again the figures for assumed net profit, taken from Tables I and 11, and in the final column the actual net profit obtained by taking the figures in the fourth column from those in the fifth. In the result, there is a loss of £6 17s. 61d. over six months. "There you are." I said, "'that is the result of taking into consideration the amounts which you will have to spend in future on tyres and maintenance." S.T.R. (To he continued)