Making Easy Money?
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RATE-CUTTING is charging less for a job than is needed if a reasonable profit is to be made. It is not confined to road haulage charges; almost every
industry suffers from it. The difference between road haulage and other industries is that in this industry the offence may be inadvertent. It comes of ignorance of the fundamentals of costing and charging, but can be countered by educating the offending carrier.
Inadvertent rate-cutting arises because newcomers among hauliers take account only of the most obvious items of operating cost and ignore the others. The obvious items of cost are expenditure on fuel, lubricants, wages and garage rent. The complete operating costs of a motor vehicle are as follows: Running costs—fuel, lubricants, tyres, maintenance, depreciation; standing charges—licences, wages, garage rent, insurance and interest on first cost.
It is helpful to realize that there are 10 items of operating cost, of which five are running costs and five standing charges. Clearly, therefore, if a haulier recognizes and takes note of only four of those 10 items, he is neglecting a substantial proportion of his expenses and is going to be at a serious loss.
The situation may be aggravated because the newcomer is an owner-driver who does not pay himself a wage, expecting to make his living from the profits he thinks he is making; he may also be at an apparent advantage as regards the premises where the vehicle is housed and thus think that he need make no provision for garage rent. If all these conditions prevail at any one time, he will be taking cognizance of only two items of cost instead of 10.
Harm Through Ignorance
The position is made still more difficult because it is possible to go on for a long time in this state of ignorance and much harm can be done to more knowledgeable competitors. Perhaps I shall make this problem more apparent if I take an example. I should perhaps remind the reader that I am, in this and my previous article, directing attention to the position of small men who are determined to buy one or more vehicles from the Disposal Board, and who have no previous knowledge of haulage, its complexities and pitfalls.
I have already mentioned The Commercial Motor' Tables of Operating Costs." The principal aim of the Tables is the education of the newcomer to a knowledge of the probable costs of operating all kinds and types of commercial vehicle, including some figures to indicate the charges he should make.
I will now take some figures from the Tables as a preliminary step towards showing how serious may be the B24 practice of assessing rates on the meagre information w hich the newcomer is likely to have. In the Tables are figures which settle, or could be made to settle, all the arguments concerning the haulier's proper charges.
I will take figures from Table HI relating to the operation of a 6-ton oiler. I shall assume that the vehicle is covering 400 miles per week and does so without it being necessary to call upon the driver to work overtime.
According to the Tables the running costs total 9.36d per mile, that total comprising expenditure on fuel, 2.51d. per mile; lubricants, 0.18d.. tyres, 1.80d.; maintenance, td) and (e), 1.89d.; and depreaktion, 2.98d. Now for the standing charges. The licence cost is I4s. per week; wages, £6 16s. per week; garage rent end rates, 10s. 6d.; insurance, 8s. 2d.; and interest, £1 Is. 6d. The total of standing charges is thus shown to be £9 10s. 2d. per week. The total cost of operating that vehicle is thus: £9 10s. 2d. for standing charges and 400 times 9.36d., £15 12s., for running costs, making £25 2s. 6d. in all.
Innocent Rate-cutting Now let me take the worst possible case of innocent ratecutting. It is assumed that the operator is an owner-driver and that he houses his vehicle in an out-house in his own backyard and thus, in his wrong view of things, costs him nothing. He pays no wages to himself as driver, reckoning that he can take his earnings direct from his profits.
I assume that he is paid £34 for the work he does in that 400-mile week, the amount recommended in the Tables as a minimum charge. His expenditure per week, as he sees it, is what he has paid out for fuel and lubricants, that is £4 10s. plus 10s. on engine oil, total £5. According to his belief he makes a profit of £29 per week.
If we agree that all the incidental items involved in putting the vehicle on the road, tax for the year, insurance premium and so on, are paid, it is possible for this owner-driver to go on for nearly a year before the need arises for expenditure over and above the amounts just specified. At the commencement of the next year, he will have to find money to pay for the renewal of his tax and insurance.
The total of those two items is likely to be £75-£80. It is unlikely that he will be embarrassed in finding that sum, bearing in mind that he is, in his own view; earning a profit of £29 per week. He is bound to have put a small proportion of that " profit " away and will thus be in a position to pay that sum without inconvenience. He may even be so placed as to be unable to realize that in that sum there is any menace to his continued enjoyment of the £29 per week profit.
I have knowledge of such cases in the early days of the industry, about 1924. That period was one of apparent prosperity to hundreds of men coming home from the war; they had no experience of commerce, only a gratuity and plenty of pluck. Very soon now we may expect the same thing to recur when eager would-be haulage contractors, taking their future in their hands, enter the industry having just the same ideas of easy money.
The reader of these two articles is now in possession of complete instructions on how to assess the total cost of operating his newly acquired vehicle. He can obtain average data relating to machines of the same size by reference to the Tables and can use these to check his own calculations. Assume that we are considering a 6-ton oiler costing £1,160 when new, and having six 35 by 7.50 tyres costing £160 net. I quote some figures calculated by a correspondent; they can be compared with those given earlier and in that way be used to demonstrate the differences that may arise when note is taken of conditions which are not average.
If I take the fuel consumption to be at a rate of 20 m.p.g. and the price of fuel to be 3s. 10d. per gallon, the expenditure on fuel will be 2.30d. per mile. Taking engine-oil consumption to be 500 m.p.g. and the cost 6s. 3d. per gallon, that is equivalent to 0.15d. per mile. We have agreed that the tyres cost £160 per set. That is 38,400d. and, if that is divided by 20,000, the assumed life of the tyres, the cost per mile is 38,400 divided by 20,000, which is a sum of I.92d. per mile.
The standing charges involved in the operation of a vehicle are usually calculated on the assumption that it works 50 weeks per year. On that basis, and continuing to take as an example the various operating cost figures for a 6-ton oiler, the following details will be found to apply. The licence, £35 per annum, is equivalent to a standing charge of 145. per week.
Weekly Wage Figure
To arrive at the correct figure for wages involves a little calculation. The net amount, according to the Road Haulage Wages Act, is £6 5s. per week; the total for 52 weeks in the year is £325. A fortnight's holiday pay, £12 10s., should be allowed for, making the total £337 10s. Add also the total of the employer's contributions under the National Health Acts, 5s. per week for 52 weeks making £13 per annum, and, finally, insurance against the risk of the payment of damage claims under common law, say, a further £5 per annum, and we have the complete figure of £355 10s. That amount must now be divided by 50 to get the appropriate figure per week, approximately £7 5s.
The reader must not be confused by the fact that, according to the above calculations, he pays 54 weeks' wages for only 50 weeks' use of the vehicle. It is a reasonable assumption that out of a year the vehicle will, for one cause or another, be out of commission for two weeks.
The user will not be able to dispense with the services of the driver for that time-on the contrary, it may be essential that he shall be in attendance on the vehicle while it is temporarily idle. In addition, as noted above, there is the provision for the payment of wages to the regular driver while he takes his annual fortnight's holiday with pay. During that time it will be necessary to engage a substitute driver to keep the vehicle in commission and pay him the statutory wages.
The next item is garage rent and that may be anything from 2s. 6d. to 15s. per week. It must be something, or, at least, some amount must be allowed in these calculations on account of garage rent, even if the vehicle is housed in a shed which is the property of the haulier.
He should realize that if the shed is suitable for garaging his vehicle, he could let it to someone else for the same purpose and accordingly he should debit his accounts with the rental value. In the Tables, 10s. 6d. is allowed on account of this item and, after careful consideration, I have decided to take that as the figure for these calculations.
Expensive Insurance
Insurance is more expensive for the haulier than it is for the ancillary user. It is usual to allow twice the amount quoted in the Tables. The insurance companies are firmly of the opinion that a man who carries the goods of other ' people and who uses his vehicle with which to earn a living is likely to take more risks than the ordinary trader; they grade the premiums accordingly. The actual figure will depend upon the make of vehicle and the district in which it operates.
The smallest premium for an " all-in " comprehensive policy is about £20 per annum, but twice that amount may have to be paid if the vehicle is one of those which are penalized by the imposition of high premiums and if it is working in a big city. The amount quoted may therefore be as much as £40 or 16s. per week instead of the 8s. 2d. quoted in the Tables.
It was agreed to assume that the price paid for the complete vehicle was £1,160. Interest should be charged on that sum at the rate of 4 per cent. That is £46 10s. (to the nearest shilling); I8s. 4d. per week.
If the reader adds together those five items of standing charges he will find that the total is £10 3s. 10d. If the vehicle is taken as working the standard 44 hours per week, the standing charge per hour can be set down by the operator as 4s. 9d.
There is food for thought in that figure. The haulier who is thinking of operating .a vehicle of this size should have in mind that whenever it is idle it is actually costing him more than £10 per week or 4s. 9d. per hour. It is, or should be, a solemn thought. I put it forward with a certain amount of emphasis as an added inducement for him first to exercise due thought before he embarkslupon this business of haulage contracting, and, second, to take all possible steps to keep his vehicle occupied on revenue-bringing employment.
S.T.R.