COSTS THAT
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MmguZgement COUNT (7) by David Lowe, MInstTA, AMBIM
HAULAGE CONTRACTORS, whatever Ise their motives, are in business to make a rofit. If profits are not made at some stage n the business operation it is certain that he outcome will be embarrassment, varying in degree from financial difficulties to financial disaster.
It may well be that the owner-driver or very small operator is satisfied to adopt the "well, it provides a living" attitude, without caring too much about such "sophistications" as costing, and return on capital and profit. This really is a negative attitude and while such an operator may see no immediate danger to his prospects for continuing in business — he may have been in business and have adopted such an attitude for a number of years —there must come a time, particularly in these days of increasing price inflation, deflated trading conditions and severe competition, when he will no longer be able to afford to operate if he goes on in this way.
If the philosophy is accepted that the business must provide the proprietor with a reasonable living; must provide sufficient funds for the operation and replacement of the vehicles; must provide a return on the capital invested; and on top of this must provide a profit on the operation, then costing in a manner such as that described in the preceding articles in this series, must be adopted. And when the cost exercise has been carried out the operator must decide on the margin of profit he is seeking from his business, and add it to the total operating cost figure for each of his vehicles.
Level of profits
The operator again has to make a lecision on the level of profit at which he Nants his business to operate. While it is -ecognized that having decided on an Arbitrary figure he may have difficulty in -caching it either in the short term or the ong term, nevertheless this does not mean hat a target figure should not be set. It is nuch better to set a target and constantly ;trive to achieve it both on individual jobs And over periods of time than not to bother And just muddle along hoping that when the Accounts are prepared at the end of the inancial year the result is a plus figure and tot a minus one.
The measure of profit decided upon has o be sufficient to enable corporation tax to >e paid and to compensate for the work put nto the business by the owner. Profit also >rovides compensation for placing the ;vital invested in the business at risk. We have already included in the standing ;cysts an interest figure which provides for he interest which could have been earned tad the capital been put in some secure Corm of saving. But this is not sufficient to over all the owner's efforts and worries in running the business, or the risk that he might lose his money if he has a difficult period and has to go out of business.
So the question is, what level of profit to set? The CM Operating Cost' tables give us the figure of 20 per cent added to the total operating cost figure but they do not add this margin to the establishment costs. However, there is just as much risk in having capital invested in buildings, office and garage equipment and suchlike, and a profit should be calculated in respect of this investment.
If we now refer back to the example figures which we have used previously the 20 per cent profit margin can be added and rates established.
We calculated the total operating cost figure of 18.78p per mile by combining the standing, establishment and running costs based on 30,000 miles annually. Therefore a 20 per cent profit added to this is: 18.78p +20 per cent =22.54p per mile On a time rather than a mileage basis the resulting figures are as follows: per year =£5635.35 +20 per cent = £6762.42; per month =0762.42 4-12 = £563.53; per week =0762.42 45 = £150.27; per hour =£150.27 + 40 = £3.76.
These then are the basic figures which are required to be earned by the vehicle over a 40-hour, 45-week year with total mileage of 30,000 if costs are to be covered, a return on capital obtained and a profit earned.
The alternative figure not shown which may be of use in some circumstances is a combination of both time and mileage costs. This would be calculated from the previous figure as follows: Total annual standing and establishment costs = £3506.35 Profit =3506.35 +20 per cent = £4207.62 per year; per month =£4207.62 412 =£350.63; per week =£4207.62 +45 = £93.50; per hour =£93.50 +40 =£2.34 Running costs were calculated to total 7.10p per mile, and with 20 per cent added for profit this gives a figure of 7.10p + 20 per cent = 8.52p per mile.
So now we have a figure -of £2.34 per hour plus 8.52p per mile which again will provide for covering all costs, the return on capital and the profit.
Returning to our example vehicle we find it had a carrying capacity of 10 tons 10ewt (Costs that Count (2) March 24), and it was estimated that it would cover 30,000 miles per year. Using this and the information given above we are now in a position to calculate rates for specific jobs.
For example, what is the job rate and the tonnage rate for a full load on a one-day round trip of 133 miles with no return load?
On the basis of the mileage rate of 22.54p per mile this equals 22.54p X 133 = £29.98 for the job; or, on a time and mileage basis this is £93.50 per week ÷ 5 = £18.70 for the day and 133 X 8.52p = £11.33 for the mileage, making a total of £30.03.
Converted to a rate per ton this equals £29.98 ÷ 10 tons lOcwt = £2.86 per ton.
This result is quite equitable in terms of a total mileage rate compared with the time and mileage rate.
However, consider the same quotation but with a round-trip mileage of 233. This provides a mileage figure of 22.54p X 233 = £52.52 for the job or, £18.70 for the day + (233 X 8.52p) =£19.85, making a total of £38.55 for the job on a time and mileage basis.
Why, by just an increase in mileage, does such a wide divergence of rate result? Checking back the figures you will not only find them correct but also that in both cases a profit margin has been included in the price. It follows then that both prices for his job are correct and would return a profit whichever was charged. The deciding factor is which rate should you charge and which rate will the customer be prepared to pay. The answer is as always to get as much as you can for the job, and in this case any rate between the two figures would provide a profitable return.
The difference in the figures occurs because the mileage covered by the vehicle in carrying out the job was far higher than the average daily mileage based on the annual estimates, ie 233 miles against 133 Miles which is the daily average based on 30,000 miles in 45 five-day weeks. What in fact has occurred is that a much greater proportion of standing costs has been recovered in this one days work than was estimated when assessing an annual mileage for the vehicle.
Next week: Break-even charts.