T HE item of interest, as it is implied in the
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schedule of standing charges, is always a subject of controversy. Some of my correspondents write and say that the amounts I quote are insufficient; some say I allow too much; others that the item should not appear at all as it is not paid out but is merely a book item. When I get disagreement of that kind I am gratified, as it proves that I am right, always bearing in mind that " ' The Commercial Motor' Tables of Operating Costs" are based on averages, and the average figure representative of those three opinions is surely somewhere between the three of them.
When I receive a letter from a haulier and note that, according to my views, he is negligent of some important matter in connection with his business, I do not immediately write to tell him of his error. I take instead the line of suggesting to him that there may be something not quite as it should be in his attitude towards that particular matter, and my method. generally takes the form of a question.
In that way I find that not only do I help a good many readers—sometimes without their knowing that they have been helped—but that in several cases 1 have helped myself by opening up new lines of thought and new suggestions whereby I can holp a number of other hauliers.
Just such a case as this arose a short time ago when I was in the middle of a series of letters to a north country haulier, a man Who, as I had already gathered, knew enough of his business to be able to make a good living out of it. That he can make a success of his business is quite enough in these days to make me respect his opinions and be quite ready to read with care anything that he might have to say on any point in relation to costs and charges.
Consequently, when he wrote to me, giving me some details of his costs of operation, and when I noted that nowhere in those costs was there any provision for the item of interest on capital outlay on his vehicles, I did not immediately write to him and say: "Your statement of costs is incomplete, for it lacks any reference to the item interest." I wrote instead: "There is no provision for interest in your statement of costs. What is your practice in regard to this matter'? "
His reply was such as to pay me many times over for being so restrained in my attitude, for it raised two points sufficiently important to warrant careful consideration. First of all, he advised me that it was his custom to keep his vehicles for five years and depreciate them evenly over that period, so that at the end of the fifth year they stood, in his books, at nil. He then sold them and set off the sum accruing from the sale against whatever he might have lost by not keeping an account of interest on capital outlay.
£120 Allowance
He was the more justified in taking up this attitude, he wrote, because he usually acquired his vehicles by hire purchase. That meant that the initial outlay was quite small, He quoted the case of a vehicle costing £1,200. The initial outlay would be £300 and at the end of five years he could usually obtain about £120 for the machine, and he thought that sum of £120 could reasonably be regarded as offsetting the interest on £300 (the initial outlay) for five years. Obviously there was a misapprehension here, especially in his attitude towards the hire purchase.
It was clear, at any rate, that if, for the moment, I disregarded the question of hire purchase and considered B26
only the value of the vehicle when new and the sum obtained for it at the end of five years, that sum does not adequately cover the interest because the interest on £1,200 amounts to much more than £120, even if it is calculated upon the most favourable basis—favourable, that is, in the sense of reducing to a minimum the amount due under that heading.
Before I can properly discuss these points, I must first of all establish once more what is meant by interest on first cost and how, according to circumstances, it should be calculated. The interest on first cost is the annual amount that would have been earned by the money spent on the purchase of the vehicle had it been invested in some safe, interest-bearing stock. Today, the rate of interest is 4 pet cent.
Actually, however, the calculation is not so simple as that, hut is dependent on the provision made for depreciation. If the owner of the vehicle establishes what is called a sinking fund and puts away, at regular intervals, an amount equivalent to the depreciation which it is agreed that his vehicle has presumed to have suffered, the sum thus set aside may itself be earning interest at the same rate of 4 per cent. If that is done, it is taken that the loss arising on account of interest on first cost is diminished accordingly.
I have dealt with this point many times and am satisfied if I can persuade the reader that my view is the correct one. 1 have shown that for the exact calculation of interest in these circumstances, when the amount due for interest on first cost is gradually diminished because of the investment on account of depreciation, the formula
L
X --should be used. (L is the assumed life of 200 the vehicle in years. P is the capital sum invested. C is the rate of interest. The solution of the formula is the average annual amount—amount not rate—of the interest on first cost.)
If, however, there is no provision for a sinking fund, the full amount of the interest on first cost is presumed to be spent and must be set accordingly against the operating cost of the vehicle.
Adequate Compensation In the case of the £1,200 vehicle we are considering, 4 per cent. would be £48, per annum and that, in five years, calculated only as simple interest, would amount to £240. Even if the particular owner 1 have in mind were to make provision for a sinking fund—and he did not—the amount would still be £29 per annum—£145 in all, in accordance with the formula, so that £120 would not be adequate compensation.
It is obvious that the matter is complicated enough without being made more so by introducing the problems involved in connection with a hire-purchase transaction. I think, however, I can simplify matters if I demonstrate merely that the conditions, instead of being improved by buying a vehicle in that way, are made just a little worse. That is not to be taken to mean I am arguing against the hire purchase of a vehicle, which is often resorted to by hauliers with insufficient capital for immediate purchase.
Take again the case of this vehicle eosting £1,200. For the sake of simplicity I will consider that no provision is made for sinking fund and that the interest on first cost is, therefore, to be reckoned in full, There is, first of all, the initial capital outlay of £300. On
sum the interest amounts to £12 per annum, or £60 for whole period of five years. he £900 balance which is temporarily supplied by the nce company in respect of the hire-purchase agreement he subject, on its account, to what is called the ammodation charge, which is usually in excess of the a interest in an ordinary schedule of operating costs.
• the sake of argument, however, 1 will assume that it is cr cent. per annum, and that will have to be paid, no :ter what may be the period over which the instalments spread. Vhen the payments are completed, the total amount, wipal and interest, is the same as though the vehicle had n bought for cash. That is a most favourable condition, lally never reached in practice. Generally, the finance apany's charge is in excess of 4 ner cent. The purchaser's nmitment is greater in hire-purchase transactions than it uld otherwise he.
think I have now made clear the two points which were ied by the correspondence with this reader and have tblished the fact that the revenue from the sale of his d vehicles is not sufficient to justify the owner's ignoring item interest on first cost. and that the purchase of a tide by hire-purchase instalments does not improve but ually aggravates matters in that particular respect.
Obtaining Prices
[ received another letter the other day. quite different from
one just discussed. It set in motion another train of night. The writer stated that whilst, in his opinion, the Indness of our system of costing and the accuracy of the ms could hardly be questioned, the prices which I ;gested should be obtained from haulage contracts were -ely to be had.
The answer to that is that these articles are directed, as ich as anything, towards helping to maintain haulage es at a commercial level. That the rates so often fall low desirable minima is because of price-cutting, which in itself, in nine cases out of ID, the outcome of ignorance actual operating costs.
I followed that up by quoting an inquiry with which I opened to be engaged upon at the time. The inquiry Is from an owner-driver who had, up to then, managed make a living carrying miscellaneous traffics for a variety local tradespeople, none of whom had any large quantity work to offer but between them managed to keep the quirer's vehicle fairly well occupied but, nevertheless, lying some parts of the week unengaged.
He can be described as a man with not too much ambition it being more or less happy in his work and the small venue it afforded. He had been offered more work and e immediate reaction on his part was fear that his orderly utinc of life would be disturbed. A curious attitude, but it altogether incredible.
Hand-to-mouth Principle
Perhaps the fact that if he took on the job he would tve to buy another vehicle bothered him as he would have take out a contract-A licence and enter into an engageent for at least a year. To have to work out a figure for s charges was for him frightening in the extreme, his • bbing haulage rates hitherto having been on the hand-toouth principle involving no need for figuring at all, but ist quotations of a most haphazard kind.
He had, however, worked out in his own mind what he tought his charge should be and came to mc for confirmaan or criticism, whichever seemed to meet the case. We ad a long talk. II was nearly an argument but, at the end, was able to persuade him that his price was wrong and he did not increase it, he would lose money on this rticular to b. 1 found that the best way to convince him that I was ght and he was wrong was to go over the items of cost. rte by one, and to ask him if my estimate of that particular cm was correct or not. After having dealt with every ecount on the list of operating costs, he was convinced, nd it occurs to Inc that, in view of the criticism referred above, a thumd of My talk with this haulier may serve useful purpose in drawing the attention of others to some
of their own shortcomings in the matter of recording their operating costs. As a safeguard against disclosing this man's identity I will deal, not with his particular case, but take as an example an inquiry from another operator.
This other man has bought a six-wheeler from British Road Services and • is therefore operating under a special A licence. He had been asked to quote per ton-mile for regular traffic between London and Manchester, running two round trips per week fully loaded each way and carrying 12 tons. He wrote asking me to quote a rate and at the same time he apologized for using the ton-mile, for he knew, as a constant reader of these articles, that I was not partial to the use of the term.
In my reply I was able to reassure him on that point, this being the sort of job in respect of which the term can be used to advantage, as the vehicle was fully loaded both on the outward journey and the home run.
As regards his operating costs, I assured myself that his vehicle was an oiler. Then I went into the question of cost.". We started that chat by my drawing his attention to Table V in The Commercial Motor' Tables of Operating Costs."
Routine Maintenance
We got as far, in discussing the operating costs, as depreciation, having found ourselves in agreement in so far as fuel, oil, tyres and maintenance costs were concerned. except that he suggested we ignore maintenance (d) as he carried out routine maintenance himself at the week-end. He had been accustomed to reckon depreciation as a standing charge, and hardly liked to •depart from his usual routine in that matter.
I said: "You paid £2,000 for the vehicle. How much of that do you reckon was payment for the A licence? "
" I took £800 for that," he answered, promptly, showing he had made up his mind about that.
"That means that the vehicle cost you '£1,200."
"Correct," he replied, "and it was hardly worth half of that sum. Still. 1 suppose I shall he able to register a corresponding figure for depreciation. That will enable me to reduce my rates accordingly."
"How on earth do you make that out?"
"W1, surely that is obvious. I value it at only £600 so that if I take live years of life I need debit miry £120 per annum."
Meaning of Depreciation
" You evidently do not appreciate the true interpretation of the term 'depreciation,' which is not a measure of the value of the vehicle so much as a provision for buying a new one when it is due to be discarded. I suppose the cost of a new machine will be about £2,400, and it will last eight to 10 years. The depreciation should be reckoned on that basis and must be set down as being from £240 to £300 per annum, and even then you will not reach your objective.
"Actually you should assess depreciation in this way. Your tyres cost about £180. Take that away from £2,400 and you are left with £2,220. Now reckon that you will get about £420 for the vehicle when you sell it, and the remainder, £1,800, is the basis for the calculation of depreciation. 'raking a life of 360,000 miles, your depreciation works out at 1.2d. per mile."
It was then that he raised his objection to the mileage method of assessing depreciation.
"Look at it this way," I said, "The vehicle will not last for ever; it will have to be replaced some time. It is to provide for that contingency that depreciation is intended. If you continue to run it at the rate of 800 miles per week, it is wearing out at the equivalent of that rate of usage. The maximum average mileage is about 360,000 miles and when that distance has been covered it will be worn out. So, by dividing the net cost, £1,800, by 360,000 you get a figure for the rate of wear per mile, which is the 1.2d. mentioned above."
He still looked worried, so I put the matter before him in this way: "There is no getting over the fact that every mile the vehicle runs it is wearing out and that I.2d, is a measure of that wear."