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Organizing for profit: Costing and efficient business administration

26th March 1971, Page 54
26th March 1971
Page 54
Page 57
Page 54, 26th March 1971 — Organizing for profit: Costing and efficient business administration
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Which of the following most accurately describes the problem?

by H. Tranter, FCA, FTII

How many public service vehicle operators during the Seventies can confidently expect to get an adequate return on the capital invested in their business and an adequate reward for their own personal labours?

At least once in every 12 months the proprietors of a business should stand back and look at their business in outline and detail, as if they were outsiders examining it with a view to taking it over as a profitable investment, both as regards return on capital and reward for labour.

It has been said "If you are not in business for fun or profit, what the hell are you doing here?" These two factors, namely fun and profit, may adequately sum up the reward a business man expects to get. If he is not enjoying (sometimes in a sadistic manner) his business then he is in the wrong trade. But we are all interested in the final figure in our profit and loss account, namely the net profit.

The factors to be taken into account in reaching this desirable conclusion are: 0 Capital employed 0 Utilization of assets to their fullest extent 0 Return on capital employed 0 Adequate use of personnel in the business Cash flow A costing system may well be described as a factual record of what has and is taking place, continually throughout a business. How many operators can quickly and easily, from their own records, give the factual information necessary for the successful running of their business? Can they at any time, quickly and easily, answer the following questions?

0 What is the average running cost per mile of the vehicles?

0 What is the effect in terms of cost per mile of the fuel tax, and any increase or reduction?

0 How do wage increases affect the runfling costs?

0 What is the immediate effect on the business of increases in such items as rates, rent, bank charges, and National Insurance?

0 At what stage in this period of rising costs does one need to apply for fare increases on your various services, or to put up the rates for private hire and contract work?

The answer to all these questions, and indeed many others, is a simple but effective costing system. The unit of costing traditionally accepted in the psv industry is that of average cost per car mile and it is on this basis for many years that the Traffic Commissioners have looked at the return on businesses when deciding fare increase applications.

In my submission, costing for the psv industry must go even further than this and an operator should know regularly from time to time which class of his work—stage; express; excursions and tours; contract or private hire—is showing him the best margin of profit. This information is essential to the successful development of any psv industry.

One further warning—do not get involved in a costing system which is so intricate and laborious that it becomes a burden. Arrange with your accountants that your day-to-day records will give not only the financial information required for the management (and indeed the Inspector of Taxes) but also all the statistical and costing information necessary to meet the requirements of the Traffic Commissioners, the Board of Trade Statistical Returns, and indeed any other information.

Annual investigation One recommendation that my own firm has successfully put into practice on a number of occasions is that of having an investigation, say annually, by management into all the expenses of a business, both large and small. Examine them in detail, decide whether they are essential to the successful running of the business or to what extent they can be eliminated or reduced.

For the successful running of your business your figures must always be up to date and always available. Annual accounts which are not prepared until 12 or 18 months after the end of the financial year are of historic interest only, apart from the purpose of settling your income tax liability.

The annual accounts should be available, at least in draft form, within a very short time after the end of the financial year and it is on these figures and your own intelligent forecasting that the annual budget for the next financial year is prepared. This must be done by using departmental figures for each of the sections of your business, namely: maintenance, excursions and tours, stage, express, contract, private hire, and so on.

While preparing your budgets, keep notes of the reasons for the adjustment of various figures as compared with your last financial year. Try to anticipate intelligently in the light of current economic policy what expenditure is likely to inchase and by how much. One must say, however, that such a budget is only of marginal use unless it is regularly reviewed and brought up to date in the light of factual information. It must also be compared with the actual performance of each period during the year.

It is essential that periodic review on a predetermined basis must be carried out and any reason for not reaching the budget figures must be closely examined and adjustments made for succeeding periods.

Turning now to utilization of assets, have you ever seriously examined in detail the extent of the assets of your business and the extent to which they are fully utilized in the conduct of your business? This is an exercise that is well worth the time involved and often results in the disposal of unwanted and unused assets, thereby bringing more cash into the business for economic use, or the fuller utilization of the particular assets concerned.

Operators are familiar enough with vehicle utilization, but have you ever stopped to examine the use of space in your business? Is your garage and fitting shop planned to the best possible use of space and the most economic movement of vehicles for your business? Are your offices adequate for what you need, or are they in fact too large? Cast a very critical eye over the non-producing assets to see if they in fact justify the expenditure you are making on them.

One of the most profitable assets of the psv industry is the goodwill of the staff and employees. It has been said that many employees, both from the bottom right to the top of the ladder are bored, docile and dull. Does this apply in your firm? Have we always assured ourselves that we have got the right people in the right jobs?

Employees are like management—their interest is not only in the job but in the end result, and how much it will produce. And while it has got to be said that some have higher capabilities than others, it is up to us to see that whatever capabilities an employee has are fully occupied and, even more important, adequately rewarded. My own experience is that employees respond to responsibility if it is coupled with appreciation for their work and adequate remuneration.

Don't forget that your telephonist and receptionist are two very important people because they give to a new customer the first impression of what your business is like. They are possibly one exception to my normal rule about too-elaborate office accommodation; they should have the most comfortable and pleasing office for the impression that it gives to the public when calling.

Many executives treat their secretaries as a status symbol and no business can afford this sort of status symbol. If a secretary is not fully employed in reasonable work then she is unnecessary—a pool of secretaries can probably deal with twice as many executives.

If your senior executives have an assistant, make sure that he has power and authority to deal with matters while the boss is away. If he is only a receiver and carrier of mes

sages then he is an unnecessary link in the chain of command, and can only cause delay, confusion and extra expense.

A subject on which opinion is often divided is that of profit sharing and bonus. One has seen recently in the sequence of strikes, both official and unofficial, the attitude of organized labour that they are entitled to share in the results of their labours.

Before talking about profit sharing or bonus schemes, one has to look at basic salaries. If his basic salary is not enough for a man's needs then his mind will not be on his work. He will be thinking of where else he can raise the necessary money in part-time jobs, etc, to maintain the standard of living he requires. If, however, this problem can be overcome, then a profit sharing scheme can be very successful and can improve the profit ability of the business as a whole—but it must be related to performance and be readily understood by all.

Finally a word about employing experts. In modern business, the employment of specialists is necessary. Specialists such as accountants, lawyers, insurance brokers and the like. Look around the field of experts before making your choice. Choose the man who is going to take an interest in your business and be available to you if required at any time.

Having made your decision then take your advisers completely into your confidence. Put all the relevant facts to them, but when they have given their advice do not try to muck about with it and seek amendments through your various departments. Take their advice, and you will retain their confidence and their future service.


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