HOW TO KEEP VEHICLE )PERATING COSTS
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Certain Factors Which Must be Borne in Mind When Preparing to Keep Records of Operating Costs, 0 NE essential for success in any business, such as that of a haulage contractor, is that of keeping a close watch on accounts. The ,period between one check and the next must be short. I know one successful
• operator, now in a big way of business, who has a chit brought to his office daily showing the result of the previous day's working and the state of the accounts up to date, so far as the current financial year is concerned.
In those statements, the debit side includes provision for inevitable future expenditure arising from wear and tear of the vehicles and its tyres, which may be presumed to have occurred during the period under review. That aspect of this rendering of accounts is most important, as I am about to demonstrate.
As a preliminary to doing so, an examination of each of the 10 items of vehicle-operating costs is necessary. They must be considered in relation to this factor—the need for frequent cnecking and their use as a basis for assessing rates and charges. I shall show that mere recording of expenditure, as and when it occurs-:-the procedure which is all that is necessary in the majority of accounts—is quite insufficient in a haulage business, for either of these essential purposes, Expiaining the Various Items Under Standing Charges Taking the items in order, standing charges come first.
LICENCE: This is the Road Fund tax relating to the vehicle. It may be paid annually or quarterly, or, in cases where the aid of a finance company is utilized, monthly.
WAGES These are paid weekly according to a statutory scale. In a comprehensive schedule of accounts there should be headings adjacent to that of wages for National Insurances and for insurance premiums paid under the Workmen's Compensation Act. In the simplest form of accounts, such as that with which I am now concerned, these are included under one heading.
RENT: This is most likely paid weekly, but may be rendered less frequently.
INSURANCE: This is the insurance of only the vehicle. The premiums are generally paid annually.
INTEREsT: This may not be paid out at all. It often goes unnoticed for that reason. It exists, however, just as much as any other of these 10 items and must be included in any complete statement of vehicle-operating costs. If the operator has borrowed money to buy his vehicle he pays interest on that money, probably annually. If he was, fortunately, in possession of sufficient capital to be able to pay cash for his vehicles, then, by using his money in that way,. he has lost the interest which his capital would have earned had he invested it otherwise. That loss must be debited as part of the operating costs. Now for a brief consideration of the running costs, FUEL: Whether this be petrol, oil, or solid fuel, it is paid for by the small operator as it is consumed. The larger operator, who buys in bulk, pays—in peace-time, of course—on monthly account.
LUBRICATING OIL: Even the small operator buys ttlis in drums, and if he pays cash he need find the money only at intervals of a month or thereabouts.
TYRES : A set of tyres may last anything from 16,000 to 32,006 miles. In the latter case, an operator having one vehicle may not spend anything on tyres for more than a year. In any case, a small operator buys tyres at only infrequent intervals. The entries under this heading are, therefore, infrequent, as they are even in the case of the large operator if the debits—as they should he— be entered against individual vehicles.
Variety of expenses Covered by "Maintenance"
MAINTENA NCE : This is an omnibus item. Its significance, and the variety of expenses which are covered by this heading, is best indicated by the statement that any expenditure directly connected with the operation of the vehicle, which cannot be debited to any other of the nine items, is due to be placed under this heading. If -the operator Will pause to recall how many times money has to be found to keep a vehicle on the road, money which, obviously, cannot be debited under any of the,other nine headings, he will appreciate what a big and important item is maintenance.
In a comprehensive schedule of items, that dealing wifh maintenance is divided into some nine or 12 sub-. headings—that, again, indicates the importance of this item.
Probably no week passes without some expenditure on account of maintenance. Nevertheless, the larger amounts of expense, those needed for engine, chassis and body overhauls, Come at infrequent intervals. Sometimes a couple of years, or more, may elapse after the purchase:of a new vehicle before any large single item of expense is involved.
DEPRECIATION: This, considered as an entry of actual expenditure, appears only once in anything from two to 10 years, according to the kind of vehicle, the work it :is engaged upon and the need for the operator to keep pace,' in his fleet organization, with current designs. It is now easy to show that, if a frequent check on costs Is to be made, and if the figures are 'to be of any use as a means for assessing rates and charges, something more than mere entries of actual expenditure, as and when it occurs, are essential: Regarding a week as the longest, period which must elapse between these checks, and a
week is long enough, then it is apparent that, if actual expenditure only he noted, it is quite possible for every one of the 10 items, except wages, to• be omitted as between one week and the next. In the case of an owner-driver, who would have no direct expenditure under the heading of wages, there would appear to be no expenditure at all.
In the bad old days of the haulage industry., it was a common occurrence for an owner-driver, a man quite possibly without any experience of accounts and lacking in business knowledge, to compare his earnings in a week with his actual expenditure, which might be no more than the money expended on petrol, and to imagine that the difference was net profit. As a result he was content with rates fqr haulage which were insufficient even to pay the operating
tests of his vehicle. This procedure depressed haulage rates to a very low level and created a situation from which the industry as a whole has not yet recovered.
It is, therefore, most important that, in any system of recording vehicle-operating costs, there should be precautions taken to see that no single item of the 10 involved should be overlooked. Moreover, there should be some provision whereby an amount is debited weekly against each and every one of these items.
If, as is likely, nothing has been spent under certain headings, then estimates of what will ultimately be involved must be made and entered: For example, taking the case of tyres, if it be anticipated that, in the course of a year, £50 will be spent on tyres, then provision at the rate of not less than Li per week must be made in the recording of these accounts.
Depreciation and What it Actually Represents Provision must certainly be made in that way for such items as tyres, maintenance, and, last but not least, depreciation which, in actual fact, is something to be set aside towards the purchase money for a new vehicle. The method of achieving this end is, as I have stated, to estimate the cost per mile of each of these items and to debit that amount against the vehicle for every mile run.
The method of entry varies and provision for checking the estimates is also desirable, I am not, however, going to enlarge just now upon that aspect of the matter. I propose to pass on to a description of the simplest and easiest way of recording vehicle-operating costs, one which will appeal to the operator who does not think it necessary to enter into any great detail, but wishes to have a reasonably accurate idea of his real total expenditure.
The method I have in mind is that widely known as
The Commercial Motor Operating Costs Records. I devised that method so that those who used it (a) could not overlook any of the 10 itemg of cost, (b) need spend the absolute minimum of time in keeping records, and (e) would .know within a reasonable' measure .of accuracy, the amount of those costs.
As a preliminary to explaining this system, there are certain peculiarities about some of the items of vehicleoperating costs which must be emphasized. Of the standing charges, four out of the five remain, to all intents and purposes, unaltered throughout the life of tlie vehicle. These four are, licence', rent, insurance and interest.
The operator can, in regard to any particular vehicle, assess these at once and determine the amount per week with reasonable confidence that the sum will remain unaltered throughout the vehicle's life, That is to say he need deal but once with this item of accountancy. As an example of what I mean, take a typical case, a 30 m.p.h. vehicle carrying 5-ton loads. The tax is 230 per annum, which is 12s, per week (50 weeks per year, because no vehicle averages more than that amount of work in a year). Rent is 10s. per week and insurance 237 10s. per annum, which is 15s. per week.
Interest calls for a little explanation. AsSume that the first cost of the vehicle was 2422 10s. Interest is not calculated on that sum, because that includes tyres, which form an item of running costs, of current 'expenditure rather than capital. The tyres on this vehicle are assumed to cost 262 10s., leaving a net capital cost of 2360. Interest oh that at 4 per cent. per annum is 214 8s., which is 5s. 9d. pen week, Those, then, are the four items, Ind the total, for this particular vehicle, is £2 2s. 9d. per week. That, 'the operator should always bear 'in mind, is the sum which the vehicle must earn for, him each week, in addition to what he pays in wages, as well 'as his expenditure on petrol, oil, tyres, maintenance, and depreciation .
No estimate is needed for petrol and oil, because the . expenditure on these essentials is something which cannot go unnoticed.
• -Tyre Cost Per Mile The price of a set of tyres has been stated to be 262 10s, The operator. must estimate, from his own experience,
what mileage he is likely to get from a set. If his estimate he 20,000 miles and if he divides 262 10s. by 20,000 he will get 0_75d.; that is his cost per mile for tyres. If he thinks he will get 24,000 miles from a set, then the cost is 0.63d. per mile, if 30,000, 0.50d, per mile,. and if only 15,000, then the cost is Id. per mile.
I propose to take 'the figure of 0.75d., which is also the figure appearing in the current issue of The Commercial • Motor Tables of Operating Casts.
Maintenance is difficult to estimate. Only an operator with many years of experience of costs, carefully and completely recorded, and as carefully analysed, can say what his maintenance costs are likely to be. My recommendation to the operator, who has not that experienee behind him,. is that he should take the figure from the "CM. Tables, Tables.
For the type of vehicle under review pre-war experience was 0.90d, per mile. To-day that is increased by at least • 33* per cent., giving 1.20d. per mile, That,' also, is the figure given in the current issue of the Tables, in the case of a vehicle covering 600 miles per week. In those tables the maintenance cost is split into two parts, maintenance (d) given as 0.22d. per mile and maintenance (e) as•0;98d, per mile.
Theie is still the item of depreciation, and that, like interest, requires some explanation. I Must leave that Ica a subsequent article.