The Fundamentals c COST R :ORDING
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IN the issue of The Commercial Motor dated October 4 appeared the first of a series of articles dealing with methods of keeping records of expenditure and revenue in connection with a haulier's business. The series, which, as I warned readers at the time, will have to be an intermittent one, and although there was a second article in the issue dated October 11, that dealt with what is more or less a side issue. This article, therefore, is really the second of the series, and as the first was of an introductory nature, neW readers may start here with the certainty that, as the story goes, " they haven't missed much."
Haulier's accounts may be almost as simple as A B C, needing no more than half an hour or so per week for their entry, or they may be so complicated as to need a fully qualified accountant to spend all his time in compiling them, and an expert auditor to check them. The fewer the vehicles and the simpler the kind of business in which the haulier is engaged, the easier it is to keep accounts. With large fleets, engaged in a variety of traffics, the accounts are correspondingly complicated, 'Accountancy Simplicity Can Easily be Overdone Obviously, the thing to do is to keep the accounts as simple as possible, no matter what the business may be. It is, however, possible for a system to be too siMple.
Most people know the story of the newly married husband who, thinking to start the business side of his married life on the right lines, presented his wife with an account book and £10, asking her to keep a note of her expenses and to come to him again when that was spent. In what seemed to him a very short time she presented the account book and a request for more money. When he opened the book he found that on the one page there was an entry, received £10, and on the other, spent £10. Could anything be simpler?
Hare, too, is a true story of a coach operator, in a moderately large business, who used to keep a bucket in the garage and stand by it as the conductors came off their work in the evening. They used to empty their money bags into the bucket and when the time came to pay wages he used to dip his hands into the bucket and pay them according to their due. That, too, is a fairly simple method of keeping accounts. It is certainly not advisable for the haulier to imitate either of these two examples. I-le may not, perhaps, even take the obvious course of entering details of his expenditure on the one side of a ledger and his receipts on the other,
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drawing the inference that any excess df the latter over the former is net profit.
The most important objection to that course, and this objection applies to a haulage business more than to any other, is that the inference is woefully inaccurate, at least it is likely to be if the period over which the accounts be taken is less than three years, or, may be, even five years. ,In five, or even three, years things may happen, as the result of mat knowing what the real profit is, which may be disastrous for the operator, if his business lasts so long.
In any event, and this is the core of the subject, accounts are not useful merely as a means for determining profits, if any, a business is making. They are intended to serve several other purposes, one of the principal being that of enabling the operator to keep a check on his expenditure so that Waste may be detected and avoided, and to note his revenues, whether they be increasing or decreasing.
Itemization Enables Costs Tendencies to be Observed
T this end some form of itemization is necessary, separation of the items under headings being essential so that variations, tendencies to increase or decrease, may readily be observed. The haulier must be able to note if his expenditure on petrol, or repairs, or wages, be increasing.
If so he can take steps to correct such tendencies if correction be possible, as it might be in the case of increases in consumption of petrol or expenditure on repairs, or if correction be not possible, as for example in the case of increases in statutory wages rates, to arrange to pass those increases on to his customers; in. other words, to modify his rates. and charges accordingly.
Most valuable of all the 'uses of cost records, so far as the haulier is concerned, is their employment as a basis for determining What the charges should be for the work he does.
Of the expenditure involved in a haulage business, the most important--that which accounts for the bulk of the outgoings---is the cost of operating the vehicles. It follows, therefore; that particular attention must be given to the items involved in that.
The process of separation begins, therefore, in this way: Take the main heading as accounts. The first sub-division is into expenditure and revenue. 'Expenditure is then, so far as the haulier is concerned, immediately divided into " vehicle operating costs " and " establishment charges."
Vehicle operating costs, as has so. oaten been emphasized in these articles and in The nnernercial Motor Tables of
Operating Costs, are again divisible into " standing charges " and " running costs," which brings us another stage in the process of separation. Next comes the division of the standing charges into the five principal items-licences, wages, garage rent, insurance, interest—and that of running costs, also into five items—fuel, lubricants; tyres, maintenance, depredation.
Nearly every one of those 10 items is capable of sub-division, some of them into a number of smaller items. For the time bein,, I do not propose to discuss that further sah-division, CUt to deal with the subject up to that stage. As illustrating this itemization diagrammatically the reader should refer to the accompanying genealogical tree of accounts.
Diagram that Shows How the Accounts are Divided
• This shows clearly how the accounts are divided. First of all there is the •main division, into expenditure arid revenue. Revenue is again divided and some of the headings which the haulier may wish to use are indicated. One is for the direct returns from haulage, another—the heading " storage "—is one which will interest only those hauliers who make a habit of storing customers' goods against delivery or for subsequent forwarding. The third which I show—" advertisements "—will accrue to those hauliers who carry posters on the sides of their vans and derive a certain amount of revenue from that source, Expenditure is divided, first, into two principal sections, establishment costs and vehicle operating costs. Establishment costs include expenditure on building, wages of clerical staff, management expenses, legal, insurance and, in actual fact, a considerable number of others
Vehicle operating costs are divided into two main sections, standing charges and running costs, and each of these is again sub-divided into five, as already mentioned, The first point which I must make and emphasize is the necessity of keeping the records of vehicle. operating costs' intact, entirely separate from all others, and comprehensive. It is, indeed, in reference to the keeping of vehicle operating costs that standardization is most essential.
The information which is vitally necessary to every operator is the real cost of operating his vehicle. The, total is probably 85 per cent, of all his expenditure. It may be more, in some cases it is as much as 95 per cent. Very rarely does it fall to as low as 80 per cent, and that in only special types of business. That fact, the ratio of operating to total costs, indicates the importance, not only of keeping records of vehicle costs, but also of having them in such a form that comparison, as between one set of vehicles and another, between one vehicle and another, is easy.
Revenue Can be Determined From Operating Costs It is no exaggeration to state that, in the case of the small operator at least, knowledge of the operating costs of his vehicles would suffice to enable him to determine, as accurately as is needed for his purpose, what his revenue should be.
From the point of view of simplicity it is helpful to know that there are 10 principal items, those already enumerated and shown on the genealogical tree. A further aid to simplicity is the fact that the 10 items are evenly divided, five of them being standing charges, live of them running costs. I would like to establish, as the first principle in any scheme of recording of vehicle operating costs, whether it he of the simplest or most complicated description, that it must make provision for independent recording of expenditure under each of these 10 items.
Without inclusion of all 10 items the records are incomplete. If extraneous items be added, then the vehicles are being debited with expenditure not properly to be included. In either case the records fail in one of the essential objectives, that they should serve as a fair basis of comparison.