Planning for Profit
Page 59
If you've noticed an error in this article please click here to report it so we can fix it.
FINANCIAL BREAKDOWN
An Assessment of Operating Costs, • Showing the Percentage Represented by Each of the 10 Items in the Total
BECAUSE of increased insurance premiums as from July 1, prudent hauliers will once again be examining their operating costs to ascertain the effect on rates, more especially as this increase is, unfortunately, just one more addition to the spiral of rising costs. In recent months, practically all the 10 items which go to make up the total operating cost of a vehicle have been increased by varying amounts, whilst the overhead cost of operating the smallest transport company has not remained unaffected.
It is therefore proposed to exarnine the cost of operating a vehicle, with particular reference to the proportion each of the 10 items bears to the whole, as well as affording a basis for comparison between the 10 items. It will also afford a means by which the incidence of any increase-or decrease -in cost could be more easily assessed.
For readers not familiar with "`The Commercial Motor' Tables of Operating Costs," however, it should first be explained that the tO items of cost fall into two groups.
These are termed standing charges and running costs. Conveniently, for memorizing, there are five items in each group.
The five standing charges are, licences, wages, rent and rates, insurance and interest. Running costs consist of fuel, lubricants, tyres, maintenance and depreciation.
The vehicle to be taken as an example for the analysis is the popular7-ton platform oiler. The initial price is assumed to be £1,700, and a set of tyres £225. If the vehicle were eventually sold for £125, then £1,350 would be the amount to be depreciated over 125,000 miles, the assumed life of this medium-weight vehicle.
Altered Balance
The weekly mileage of the vehicle is taken as 800, and it is most important that this figure should be borne in mind when comparing the various items of cost. If the mileage were only 400, not only would the running costs be reduced, but the balance between standing charges and running costs, as well as between the individual items, would be altered. A mileage of 800 has been taken as a compromise between medium-distance running of approximately 500 miles per • week and 1,000 miles or more incurred in long-distance Operation.
Allowing for an annual tax of £42, a further £2 must be added if the vehicle is operating under A licence. (This is appropriate to the newly raised cost of carriers' licences.) To obtain a weekly licence cost, the total of £44 is divided by 50, not 52, so allowing for two weeks per annum when the vehicle will be earning no revenue because of holidays.
In addition to a wage of 165s. payable to drivers in the over 5 to 10-ton class (R.14.62), national insurance contributions will also have to be paid. Employers' liability insurance would also be advisable and the figure of 178s. 10d. per week includes all three items, with an addition to allow for two weeks holiday. Rent and rates are arbitrarily taken as 10s.
per week, or 10s. 5d. on a 50-week basis. •
Inquiries made by The Commercial Motor following the recent announcement of increases in insurance premiums disclosed wide variations not only in basic rates, but also in the percentage increase in individual cases. An annual premium of £100 has been assumed in this instance. Interest has been calculated at 3 per cent. on £1,700.
As an extension to normal practice whereby the five items of standing charges are shown as weekly totals, in order to facilitate comparison with running costs, these items are also . shown in terms of cost per mile.
Of the running costs, fuel is based on a consumption of 16 m.p.g. with fuel at 4s. 3d. per gallon. Increased mileages are reported as now being obtained from modern tyres and a life of 40,000 is assumed in this case. As with lubricants, a 10-per-cent, increase has been added to the cost of maintenance as shown in the Tables.
Finally, depreciation is obtained by dividing £1,350 by 125,000, the vehicle's assumed life, as has been mentioned earlier.
In the accompanying table, the total standing charges amount to 4d, per mile, with a total operating cost of 13.46d. per mile, despite the fact that these are spread over 800 miles per week. In fact they represent almost 10 per cent, of the total cost, and would be more still if the weekly mileage were lower than 800.
Majority Items
ft will be noticed that three of the 10 items of operating costs account for over 62 per cent, of the total. They are: Fuel, 23.70 per cent.; wages, 19.91 per cent.; and depreciation, 19.24 per cent. If a further three items are added, i.e., six in all out of a total of 10, namely maintenance, tyres and insurance, a total of over 92 per cent, is obtained.
Two items often overlooked by beginners are maintenance and depreciation, probably because they do not always have to be met immediately. Yet in this example they represent a third of the total cost, 34.62 per cent, to be precise. It is, in fact, this surprisingly high proportion that unfortunately provides the temporary opportunity for the unwise operator to undercut his rates as long as he is able to put off the evil day.
Should any increases or decreases subsequently occur to any of the items of cost in the above example, it is a comparatively simple matter to estimate the approximate effect on the total operating cost of the vehicle, and ultimately on the rate to be charged. A 10-per-cent. increase to either fuel or wages, for example, would add 2 per cent. to the total cost.
Increases in insurance premium rates ranging from 15 per cent. to 70 per cent, have been mentioned. A 50-per-cent. increase in this case would amount to an additional 0.30d. per mile, or 0.44 per cent. of the total cost. A word of warning should be 'given here to those not familiar with costings in terms of pence per mile. Discussion of increases amounting to 0.30d. per mile .may, at first-sight, seem trivial. Yet in this particular instance it would amount to exactly £1 per week per vehicle, and if the operator could not adjust his charge he would be the loser by just that amount.
Apart from providing a quick assessment of the effect of any increases over which the haulier has no control, the percentage shown in the table emphasizes the items which provide the greatest potential return for the application of any economies that could be effected. S.B.