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What Is a Fair Profit?

1st November 1940
Page 22
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Page 22, 1st November 1940 — What Is a Fair Profit?
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Which of the following most accurately describes the problem?

Solving the Problems of the Carrier

IHAVE a presentiment that things are going to be made very difficult for some hauliers. Nothing new, perhaps, but my feeling is that they are going to be made more difficult now than hitherto.The way of the transgressor is going to be harder. The troubles of the man who cannot he bothered to keep records of his costs and earnings are going to increase.

Those operators, for example, who have steadfastly refused to acknowledge the existence of the Road Haulage Wages Act, and will not pay their men the wages scheduled in R.H.4, are now going to have their sins discovered and exposed to the open view of the Government officials concerned. Hitherto, by blackmailing their employees, they have been able to ensure that no report of their shortcomings has been made.

Now, because returns have to be made of all wages paid, so that the amount of the deductions for income-tax can be assessed, these scales of wages are going to become, if not public property, at least accessible to the inspectors appointed under the Wages Act. It will be good for the haulage industry as a whole and, for that reason, however reluctantly further interference by the Government with haulage businesses may be accepted, this new development must be welcomed.

• Records of Costs Now Vital • The new Order by, the Minister of Transport, giving control of rates increases to the Regional Transport Commissioners, makes it more imperative than ever before that complete records of costs be kept and that these records should include not merely actual expenditure, but provision 'in advance for maintenance, cost of repairs and overhauls, new tyres and the replacement of vehicles. The last-named, of course, comes under the heading of " depreciation." The importance of that matter has been urged time and time again in these columns.

The point now is that, in deciding whether some increase in haulage rates is justified, the Minister, in the person of the Regional Transport Commissioner, may ask to see records of expenditure. If they be not available he may refuse the racrease ; if they be not complete in the matters outlined above, he may fail to see any justification for the increase.

I believe that the Regional Transport Commissioners will be found to be reasonable in this matter. They will not be inclined to encourage attempts to compel the haulier

to run at uneconomic rates. It is the Commissioners' assistants, the office staff, the lesser lights of the ministerial firmament that I fear. Not all of them have got the knowledge which is essential if fair judgment is to ensue from their investigations.

The big snag is the assessment of a fair profit. It is there that the officials, without practical knd'EvIedge of the conditions of the haulage industry, are so completely at fault.

Here is an incident which proves that to be the truth and confirms my statement that there is, in some cases, profound ignorance of the essentials of road-haulage costing and earnings. I was arguing a case with an official of a civic authority. The problem was to assess a charge for the hire of some vehicles.

We had discussed costs, that is to say, vehicle operating costs and establishment expenses, with agreement on some points, but not on an. Then came the question of the amount of profit which my haulier friend should reasonably expect as the result of hiring these vehicles. This official suggested 5 per cent, on the capital invested in the vehicles !

For a moment I was too taken aback to reply. Five per cent ern, say, a £350 4-5-ton lorry is 417 10s. per annum. For the period of hire which was the subject of discussion, namely, a fortnight, this official suggested that a profit of 14s, should be sufficient!

Now. I had expected to have to do some bargaining on thin question of the amount of profit, but never anticipated that the other side would start so low down the scale. The circumstances, too, were such that I had to keep on the right side of the fellow, otherwise my answer would have been very terse.

As it was, I did tell him that as he suggested that method of assessing the rafe of profit it showed he was not very well acquainted with the customs and conditions of the haulage industry, and I put this point of view in this way.

A haulier's vehicle is a tool Of his trade, just as much as the tools, of the plumber, or any artisan. If I assume that a plumber pays £20 for his tools, surely it would be ridiculous to suggest that his maximum annual earnings should be no more than 5 per cent., of that, say, £1 per annum. Or, in my own case, suppose I pay £30 for a typewriter, is it suggested that my earnings should not exceed 30s. per annum?

The subject must be viewed from this aspect. One man with a lorry costing £350 may run that vehicle 10,000 miles per annum at a cost, including establishment expenses. of £6110. Another will run his vehicle for 5,000 miles and

his cost will be approximately £1,200. It is absurd to suggest that both of these operators should he satisfied with the same amount of profit, and completely ridiculous that an amount of £17 10s, per annum, should be suggested as the total of that profit in each case.

• Energy Has Its Reward In Profits •

The profits which 'a haulier may earn must be in proportion to the energy which he puts into his business and in proportion to the money he spends on his business, and that does not necessarily bear any relation whatever to the amount of capital he has invested.

An owner-driver who makes a fortunate purchase of a second-hand vehicle for £80 or so may, by his enterprise and the way in which he conducts his business, earn a profit of as much as £250 or £300 per annum. That, obviously, bears no relation to the capital he has invested. Admittedly, that is an exceptional and not very probable case.

It is at least reasonable to suggest that, in the two cases stated above, of the man whose vehicle cost, in the one case £600 and, in the other case, £1,200 per annum, that the profits earned by the second man should amount to twice those earned by the first. Actually that proportion, that profit calculated as a percentage on expenditure, is in addition to the 4 or 5 per cent, interest on capital outlay which, as every reader of the journal knows, is to be regarded as an item in the operating costs of the vehicle.

The question is, what should the proportion be? Always important, the point has now become vital to operators who may have to face the Regional Transport Commissioners and fight for increases on their pre-war rates. I say that it should not be less than 15 per cent. on long-term contracts, or on work which offers security of tenure and regular employment over periods of not less than two years. The same proportion can be applied in the case of regular trunk services which, taking the year through, carry a fairly high percentage of full loads. It may also be applied to parcels and express carriers. On most other work, such as general haulage over medium to short distances, where the prospect of employment is to some extent of the hand-to-mouth order, the proportion should not be less than 20 per cent. In exceptional cases even 25 per cent, is a reasonable expectation.

I repeat and emphasize that this percentage is calculated on the total expenditure; that is to say, on operating costs, plus establishment expenses, and not on vehicle. operating °costs only. In that way provision is made for the high ratio of establishment costs in such businesses as trunk services and express carriers.

In those far too numerous examples where the amount of the establishment expenses is not known with any degree of accuracy, a rough approximation can be reached by adding 33/ per cent, to the total vehicle operating costs. The latter, however, must include the items to which I have already referred; that is to say, provision for estimated expenditure as well as for actual cost. The 331 per cent. is gross, not net, profit, and includes the establishment expenses, which must be deducted in order to arrive at a figure for net profit.

• What is Provided fot by the 331 Per Cent. Profit •

Incidentally, it is remarkable how near that 33/ per cent. is to actuality, in the case of many haulage concerns. It allows the 15 per cent, profit in the kind of business to which I have stated that percentage applies and provides for the somewhat higher proportion of establishment costs which are common in such businesses.

On the other hand, establishment costs are not usually so high on medium and short-distance services, and, therefore, the addition of 331 per cent, to vehicle operating costs, allows 20 per cent, net profit, because the abstraction of the establishment expenses is not so big a factor.

I have also found that there is, in the official mind, a misunderstanding of the true inward meaning of the 15 and 20 per cent. which I am suggesting are reasonable.

In another case, where I was disputing with a Government official, the suggestion was put forward that industrial concerns were content with 71 per cent., or even less.

There is, obviously, some confusion of ideas. A figure of 71 per cent. may ber reasonable in some business, but it is impossible in the haulage industry. Perhaps the following example, based en figures taken from the accounts of a large haulage contractor will clarify the matter somewhat.

• Proving a Net-profit Argument •

The company had a capital of £120,000. In the financial year prior to September. 1939, a net profit of 71 per cent. was declared. That I imagine is what this Government

official had in mind. The expenditure in that year on vehicle operating costs and establishment expenses totalled

little over £50,000. Now, 71 per cent. on £120,000 is £9,000, and £9,000 expressed as a percentage of the annual expenditure is actually 18.

A correction must, however, be made for the fact that in the total 'of vehicle operating costs and establishment expenses there is an item for interest on capital spent on the vehicle, and that approximated to £1,200. That would, of course, be included in the declared profit of £9,000, and If I subtract it, leaving £7,800, I get the net profit, apart from the interest on capital outlay in vehicles. The sum of £7,800 expressed as a percentage of £50,000 is 15.6, and that.is what I mean when I say that the net profit should be approximately 15 per cent, of the annual expenditure.

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