Essential Safeguard
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Recording 'Amounts laced to Sinking Fund and Expenditure from It. Examples in Relation to Various Sizes of Vehicle. The Hirepurchase Problem
1N writing these articles I have had. two objects in view.
First has been that of demonstrating to new-corners just what their expenditure is likely to be. My second object is to describe a simple method of establishing a sinking fund from which cash can be withdrawn when required, as, for example, when tyres have to be replaced, expensive repairs carried out, tax paid, or insurance premium renewed. I come now to this, the second part of my scheme.
Referring to the figures set out in the accompanying tables. the average expenditure on tyres is taken to be 1.00d, per mile, and on maintenance 1.74d. per mile, while the amount. to be set apart for depreciation has been shown to be 1.08d. per mile. The sinking fund on account of licence is as set out in Table II, 12s. per week. and for insurance 15s. per week.
'Assessment on 100-mile Basis It is convenient: to assess the sinking fund for [tinning costs on the basis of each 100 miles run, and ,n that way the total, which is 3.82d. per mile, can be taken to be £1 12s. per 100 miles. The total amount on account of standing charges is only £1 7s. per week, as, of course, there is no point in providing a 'sinking fund for interest, which is something Which iS.;:not actually it'n expense, but as it might be termed, a book debit.
Table IV sets out the essential savings, on account of sinking fund, in relatiOn to a 5-ton lorry. The operator may either open a separate account in his bank or may check his balance from time to time, deducting from it sinking fund, less expenditure, and making sure that he does not encroach upon that balance.
One good way to do this is to keep an account book, on the lines of Table, IV. On the left-hand page should be entered the debits to the. sinking , fund, and on the right capital expenditure on the items for which the fund has been established. It is _convenient for each page to serve for three months of operation. At the end of three months the operator can then strike a trial balance as shown.
In entering the amount for she sinking fund under the heading" Running Costs," I have not gone to the trouble of working it out for the actual mileage, but have calculated. it to the nearest 100 miles. Thus, for the 342 miles, the first entry for the week ending October 4, I have taken three times £1 12s., which is £4 16s., .because 342 is nearer 390 than 400. For the second week, the week ending October .11, a3.2 where the mileage is 465, I have taken 500 miles and entered £8.
The operator who is not used to' budgeting may think this is not likely to give results which are reasonable accurate. Really, he is wrong.. and just to show him that I have worked out the actual amount on the basis of the accurate figure of 3.82d, per mile. • The mileage covered during the three months is the difference between the mileage brought forward, 25,612, and the • Iota! carried forward, 32,085, and the difference is 6,473 miles That Multiplied by 3.82d. per mile, gives me £103, Os. '6d. The difference between £410„ the amount brought for‘Varcl at the beginning Of the quarter, and £514, the amount Carried forward at the end is £104,, so that there is an error of slightly less than 1 per cent..
It is of interest to examine this record of sinking fund and expenditure account as set out in the table. The first thing to notice, is that,according to the credit side of'the account, £198 3s. 4d. has already been spent on items for which the sinking fund is established before this date.
Expenditure is entered on the credit side as it occurs The items appearing are —A new set of tyres, a quarter's licence, insurance premium, engine overhaul, new springs. The total of these is £216 10s. which,' added to the £198 3s. 4d. brought forward, gives us a total of £414 13s, 4d.
That amount subtracted from the total of £627 I5s. of the sinking fund leaves £213 Is. 8d., which is the balance still • in the bank towards any further expenditure and—this must • not be forgotten—the purchase of a new vehicle.
• Fund More than Sufficient
The vehicle has now run off one-third of its life of 100,000 Miles and there is in the bank rather more than one-third of the amount needed to buy a new vehicle, which goes to show that our calculations have been reasonably accurate.
There are two advantages to the new-corner in this method of dealing with ,operating costs. In the first place, and this is the short view, the operator has always money available for any major item of expenditure. The other advantage. which, of course, is the more importantcone, is that in • putting these sums away he does not fall into tit.: error of assuming, that all this money is profit;.......... I will apply the method to three other sizes of vehicle,
and first of all a 7-8-tonner with oil engine. Dealing with the running costs first, the cuirent items of expenditure on fuel and oil will probably be in the region of 1.40d, for fuel and 0.20d. for oil, a total of 1.60d. per mile.
The sinking fund itemsare 1.25d. for tyres, 2.00d. for maintenance, 2.05d. for depreciation; that is, 5.30d. per mile for sinking fund. The amount to be set aside per 100 miles is 530 pence, or, as near as it need be, £2 4s. It should be noted that the total running cost per mile of this vehicle, according to these figures, is 6.90d.
Now to turn to the standing charges. The items of current expenditure are: Wages, £5 5s.; garage rent, 10s.; giving a total of £5 15s. The sinking fund items are: Licences £1 8s. and insurance £1 10s., whilst interest is £1 12s. The total is £4 10s. per week and the total of standing charges is thus £10 5s. per week. The sinking fund amount is, of course,the sum of the licence and insurance, which is 12 18s, per week.
Bare Costs
Completing the story of this vehicle as I did in the case of the first one, it should be noted that £10 5s. per week is equivalent to 4s. 8d. per mile and the running cost can be taken as 7d. per mile. I must again stress that these are the cost figures only and not the amounts which must be charged for the use or hire of the vehicles, for in those figures we need to make allowance for establishment costs and profit.
For my next example I will take a maximum load eightwheeler-that is to say, a 14-toarier-and again I will assume it is oil engined. Items of current expenditure will approximate to 1.80d. per mile for fuel and 0.25d, for oil, a total of 2.05d.
On account of the sinking fund we have for tyres 2.40d., for maintenance 2.20d., and for depreciation 3.40d.---a total of 8d. per mile on that account, which is equivalent to £3 6s. per 100 miles for the sinking fund. The total running cost per mile is 10.05d.
As for the standing charges, we have for current expenditure wages £5 10s. per week and garage tent '5s., a total of £6 5s.
The sinking fund items comprise licences £2 4s., insurance £2, and interest is £2 6s., the total being £6 10s., so that the total of standing charges is £12 15s. per week. The actual amount to be put in the sinking fund is, of course, only for licences and insurance, adding up to £4 4s. per week
Figures for Mileage and Time
Here, again, I may as well take out the figures for cost per hour and per mile. Twelve pounds fifteen shillings per week is equivalent to 5s. 911 per hour of a 44-hour week, and it is safely accurate to take that as 5s. 10d. per hour and the running cost as I0d. per mile.
For my third example I propose to take a 32-seater coach, this time petrol engined. For the running costs we have, first, the current items-petrol 2.50d. per mile and oil 0.15d., total 2.65d. For the sinking fund running-cost items we have tyres 1.30d., maintenance 2.20d., depreciation 4.50d,, a total of 8d. per mile, which, as in the previous example, is equivalent to £3 6s. to be debited against sinking fund. The total running cost is I0.56d. per mile.
Turning now to the standing charges. We have for current items, wages £5 5s., rent 15s., a total of £6. For the balance there is licence El 3s. per week, insurance El 5s. per week, and interest £2 5s. per week, making a total of £4 13s.
The total cost per week for standing charges is £10 13s., which approximates closely to 5s, per week, and the 10.65d. can be taken to be 100. per mile, so that the cost-certainly not the charges-should be on the basis of 5s. per ',our, plus 1031d. per mile.
No series of articles of this kin] would be complete without reference to hire-purchase. The facilities offered by the finance companies, in that they enable a new-comer to the industry to obtain his vehicle and start to operate on very little capital, are regarded sometimes as a blessing, but quite often as a curse.
Obviously, the operator who makes use of these facilities must regard them as a blessing. They enable him to set up in business for himself in a way which would probably otherwise be impossible. They are also an advantage, in my opinion, in that to a certain extent they operate, during the first 18 months or two years, in the same way as the sinking fund, inasmuch as that the knowledge that he has to find a considerable sum each month to meet his instalments prevents the onerator from cutting his rates below cost.
Hire-purchase and Rate-cutting
Those who condemn hire-purchase. facilities claim that what often happens is that an orerator finds himself near the date when he must pay an instalment and has not the cash to meet it. He, therefore, will take any job at any price, and that is a step in the downward grade in rate-cutting.
It may be asked why I have not made provision in this sinking fund for instalments on hire-purchase. I have a positive answer to that, namely, that I am concerned with only the operating costs of the vehicle and, as I have so often emphasized, hire-purchase, either as to the instalments or to the interest, is not in any way to be considered as an item in the operating cost of a vehicle. Nevertheless, the sinking fund does provide a reserve for emergencies.
Take, for example, the figures quoted in Table IV. The operator at the end of 15 months has a balance of £213 Is, 8d. Assuming that the amount thus accumulated has grown at the same rate month by month, that means that he has been saving approximately £16 10s. per month. Actually it will be more than' that in the beginning, because in the fiest two or three months at least there will be no expenditure at all and he will be saving something like £30 a month,
In a real emergency, as, for example, in order to meet the payment of an instalment' on hite-purchase, he could draw upon that fund. He must, however, make a special note on his expenditure account to the effect that this amount has been borrowed arid must ultimately be repaid.
It might even be regarded as fair and reasonable to allocate the whole of the depreciation sinking fund towards payment of hire-purchase instalments until that debt is cleared off. There is, indeed, not a great deal of harm in it, so long as the amount be replaced. q T. 12.