BREAKING IT GENTLY
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The Soft Touch Needed in Explaining the Cost of Operation of a Motor Van to a Trader who Proposes to give up Horsed Transport
WHEN I give the solution of a problem presented to me this Week by the local grocer, in which I recommended him to reckon only petrol and oil costs as operating expenses, I shall be accused of going back on my own counsel, of preaching one thing and practising another. I can give as part of the reason for this apparent change the fact that this really is not a haulier's problem but that of a grocer who has been using a horse and van for his collections and deliveries and who is now thinking of buying a 10-cwt. van. He wants to know what it will cost to run, having been warned by several of his friends that it will cost him anything from £8 to flO per week, exclusive of wages. His mileage, incidentally, was expected to be 200 per week.
It was quite obvious from this query that someone was trying to frighten this man and put him off buying a motor vehicle by suggesting that the cost of running such a vehicle was quite beyond his economic means, If, however, I were briefly to refer this inquirer to " ' The Commercial Motor' Tables of Operating Costs," he would discover that the total cost of operating a 10-cwt. van for 200 miles per week would be £11 17s. and, judging by the tone of his letter, it would just about make him swear never to have anything to do with motor vehicles.
It would not improve matters, either, if I were to point out that out of that total, £6 10s. was wages because, even then, it would be apparent to him that his vehicle was going to cost him £5 7s. per week. Even that might be all right if I could be sure that he fully appreciated how much and how many items were included in that sum. As, however, I can be certain that he has not that knowledge, the best thing to do is to give him the information a little at a time— to spoon-feed him, as it were—so as to avoid the risk of indigestion.
The Whole Story
1 told him, therefore, that his costs would be made up as follows: petrol, oil, tyres and repairs, 3.80d. per mile. (I should point out that I am taking the figures direct from the current issue of the Tables.) At that rate the cost per week of 200 miles amounts to £3 3s. 4d. It is quite possible that these four items are all that he has in mind, and that if I were to leave the answer at that I should really have done all that was necessary. Obviously, however, that would not be quite fair, and 1 added that there would also be expenditure on licences and insurance which would be equivalent to 10s. 6d. per week. The cost, therefore, for a 200-mile week, would total £3 13s. 10d. If he does more than 200 miles per week, he needs only to add 3.80d. to the.total for every additional mile to arrive at his cost; on the other hand, if he runs only a few miles less than 200 in a week, he subtracts 3.80d. per mile from the total.
I assumed that he would be keeping the vehicle-on his own premises, just as he does his horse and van. That being the case,and as he was not using the vehicle to earn a profit, there was no point in reckoning anything for rent and rates of a garage. I also advised him that there was no allowance in the figures for depreciation or interest on first cost.
I am referring to this problem here because it occurred to me while I was answering this letter that there were probably many hauliers or potential hauliers today who were alarmed at the figures for cost as they appear in the Tables. Take, for instance, the case of a man who is thinking of making a start with a couple of 5-tonners, acquired from the Commission. He has made some preliminary inquiries as to the prospects of business and can see possibilities of doing at least 300 miles per week. The work will be available for B32
him as soon as he is ready. He has, perhaps, quoted for the work in prospect on the basis of the figures in the Tables and his tender has been provisionally accepted.
He is quite satisfied that he will get his money, but is also aware that in the ordinary course of business he will not receive his first cheque on account until at least a month has patted. He takes a look at the Tables and finds that the operating cost of a 5-tonner doing 300 miles per week is £20 18s. for that period, so that it looks as though he will have to spend about £84 before he begins to see any return.
So far as he is concerned, he is, to his customer, a newcomer and therefore not yet in a position to ask for credit. That is going to be rather a big stumbling block or, perhaps I should say, appears to be. It may be as well, therefore, if I point out that that £84 is not necessarily actual expenditure during the first month.
A man starting business in this way will naturally have made full allowance for the initial expenditure on his• vehicles. It will not matter whether he is buying a couple of machines from the Commission or buying a new one; whether he is paying cash or by instalments, he will still be aware that among the items of expediture he will find and which he will necessarily have to meet will be those of licences and insurance, so that by the time the wheels of that vehicle are rolling and work begins he will have dealt with theft items; they, will be behind him.
He will have his garage rent to pay—he may have to pay that in advance. The amount will be between £2 and £2 10s. Over and above that he is not likely to" spend anything for some months to come, except what he has to pay for petrol and oil and that, at 300 miles per week, will be less than £5.
In the first month, therefore, the cost to the haulier of running a 5-ton lorry, including 'the garage rent,, should be no more than £20. If at the end of the monthhe is paid for his month's work according .to ou schechile, he will receiveahout £84. He will, therefore, from that time onwarils be in a position easily to meet expenses and will, for some time to come, remain in that position. What I must emphasize is that he must make provision for the payment of the other items that will have to be met eventually. He must lay aside each month enough to enable him to meet the heavier items of expense, the renewal of tyres, licences, insurance, the cost of an overhaul and, ultimately, the renewal of the vehicle itself. The building of that reserve, however, does not need to begin as yet.
Another aspect of haulage business, suspended during the period when new vehicles were not to be had and used ones cost the earth, is beginning again. Apparently the buyers' market seems to have arrived; at any rate some used machines are coming on to the market at quite low figures. The effect seems to be that certain "catch as catch can" operators are buying vehicles cheaply and using them as a means for cutting rates, much to the discomfiture of a correspondent, who has not for a long time _experienced anything quite like this.
He writes to me asking what he should charge for the hire of a 3-tan van. He has been quite happy, up to now, serving a local vendor of used furniture, and has been accustomed to charge at so much per hour plus an additional charge per mile run. Apparently the new competition is worrying him, and he would like to know just how he stands and how much he can dare to reduce his own charges to meet this competition and yet be sure of making at least a reasonable profit. He has been charging-and receiving is. an hour and Is. per mile. This is a little more than is ecommended in the Tables.
He states that the locality is hilly and his fuel consumpion is about 10-12 m.p.g. Tyres do not wear well; he nentions covers which do no more than 12,000 miles. So ar as maintenance is concerned, he carries out his own unning maintenance but puts the big jobs in the hands of he local garage, agents for the type of vehicle he uses. us cost of maintenance is higher than those of the Tables. He gives a couple of examples of the sort of work for thich he is at present tendering. One of his potential con-acts apparently is with a local confectioner, for whom he opes to run three 4-mile trips per day, taking 4-hour for ach run, during which time he loads and unloads. Another ib is for a newsagent, for whom he does a 24-mile run, ccupying 2 hours for each round trip. That, however, ccupies only 4 hours per week, for he makes only two trips er week, He does not state what is the mileage run each eek.
It may be taken for granted that notwithstanding what has een divulged in his letter, the actual weekly mileage varies om week to week. Not all the confectionery runs are to le same destination, and the newspaper run is similarly regular. In answering his letter, therefore, 1 tried to give m something based on his own method of charging. At e very outset it struck me that I should have to assume me specific number of hours per week. The charge per tek would necessarily be based upon the total of standing larges together with the establishment costs and profit. the case of a 3-tonner, these are likely to be as much as 0 10s.
In calculating the charge to make per hour, attention must be given to the fact that whereas the standard working week is 44 hours, this vehicle will be at work for only 36 hours per week. On that basis, the charge per hour must be 1/36 of £10 10s. plus profit. That cost is nearly 6s. per hour. For profit add 25 per cent, of cost, Is. 6d. per hour, and the charge is seen to be 7s. 6d. per hour. That is the minimum charge for time, with no provision, as yet, for the miles run per week. The actual rimning cost is about 8d. per mile and I recommend a mileage charge of 10d. per mile, that covering the cost of 8d. per mile plus 25 per cent. profit.
Profit of £2 9s. fid.
It is of interest to see how these figures apply to the two contracts to which he refers in his letter. First of all, there is the contract with the confectioner. There are four journeys per day, each involving 12 miles of running and a total time per journey of 1-hour. For mileage the charge is 10s.; for time, 4-hour at 7s. 6d. per hour, that is, 3s. 9d. The total is 13s. 9d. each trip. He earns, therefore, £2 is. 3d. per day on that work, with allowance for profit of 8s. 3d. per day-£2 9s. Gd per week.
The newspaper job earns, each journey, 15s. for 2 hours at 7s. 6d. per hour plus £1 for 24 miles at 10d. per mile. That is a total of £1 15s. per trip or £3 10s. per week, as
only two journeys are required to be completed per week. The profit per week from the two contracts together is £2 3s. Gd.
On the matter of rate-cutting, to which this inquirer made passing reference, he tells me that his competitor is charging 8s, per hour with no charge per mile. My correspondent grumbles at that, hut I am not so sure that there is any real rate-cutting. If his vehicle runs more than 36 hours per week he can probably work for a lower rate and still make a reasonable profit, certainly not as the result of cutting rates.
Limit on Mileage
Let us assume that the operating cost is still as calculated above, namely i10 10s. per week and 8d. per mile. His vehicle is profitably engaged for 48 hours per week. His charge. we are told, is 8s. per hour, regardless of mileage. I think we may also take it that there is a limit to the miles run for that charge-we have no justification for assuming that this competitor is bereft of any brains at all-and we will, on that basis, assume he limits to four the mileage per hour under which he works at 8s. per hour.
According to our previous calculations, his expense on free mileage is limited to four times 8d. which is 2s. 8d. Actually his average mileage per hour throughout an average week is three, costing him 2s. The week's work therefore brings him a revenue of £19 4s. His outgoings for the same period total £10 10s. for standing charges, plus £4 16s. for mileage, a total of £15 6s. He makes a profit. although a small one, As long as he does that we arc not in the position of saying that he is rate-cutting. S.T.R.