JUSTIFYING THE "HIGH" HIRI
Page 36
Page 37
If you've noticed an error in this article please click here to report it so we can fix it.
JRCHASE RATE
Solving the Problems of the Carrier Hire purchase Interest Considered in its Relation to the Haulier's Profit and Loss Account Over the
Applicable Period
THE article that I wrote a few weeks ago seems to have created the impression that I think the rates of interest charged on hire-purchase transactions are exorbitant. That is quite incorrect. The " charges " which are made for the accommodation offered in respect of the purchase of vehicles and, indeed, for other things as well, are actually quite reasonable, even moderate, if all the circumstances be taken into consideration.
The gross rate of interest, calculated according to orthodox methods and, actually in so far as the return to the companies is concerned, is approximately 14 per cent.—less rather than more.
That 14 per cent., it must in all fairness be emphasized, is not by any means all. profit. Indeed, the haulier might well take a lesson from the consideration of that fact. It is no more true to state that there is 14 per cent. . net profit on the business than it is to take, in the case of the haulier, the difference between the operating costs of his vehicles and his total revenue and to assume that that balance represents the profit. The finance companies, like hauliers, have their overheads to meet, and it must be fairly obvious that they are comparatively heavy. I have no information as to the precise amount, but it must be in excess of half the gross amount and probably exceeds two-thirds.
• Outgoings to be Reckoned With • Out of that 14 per cent., provision has to be made for the upkeep of expensive offices, of expert accountants, of provincial offices and staffs, of travellers, of advertising, of legal expenditure, of losses on repossessions, and so on. In addition, there may be, in some cases, commissions to be paid.
The article under discussion was written in answer to an actual inquiry, made to me at one of the meetings I addressed last season. As written it was an answer to that inquiry as it was put to me, and, notwithstanding the above and the castigation I appear to have received at the hands of so many of the finance companies concerned, I am still of opinion that my figures are correct, considered in the light of the request.
It is not even the case that I am in any way opposed B2 to the general principle of hire purchase. On the contrary, I think it is generally a good thing, and one that has been and will continue to be a considerable factor in promoting trade, and in keeping the wheels of industry turning. One has only to try to realize what would be the position of the motor industry, the furniture industry, the piano-making industry, the wireless trade and many others, if hire-purchase facilities were suddenly to be withdrawn.
It is, on the other hand, a fact that, in its application to our industry, hire purchase has been responsible for a good deal of harm. There are many responsible hauliers who will wholeheartedly agree with me there. At the same time, it is probably correct to state that those hauliers who have abused the system would have made trouble for the industry and themselves, even if they had not had hire-purchase facilities to help them. They would, however, have been " outed " more quickly.
,It is of interest to look upon this business of hirepurchase " charges " from another angle—to show how, even with practical figures for earnings, there are advantages in taking the help of the finance companies.
Let me take two examples, of hauliers doing the same kind of work, operating the same numbers of vehicles, covering the same annual mileages and—as may be unlikely to happen in real lifeboth earning the same annual gross profits.
Of the two, let us assume that one starts with a capital of £5,000. He buys eight vehicles at mop each and uses the balance of £1,000 to finance his early operations, to carry him through the difficult period during which he is building up his business and his goodwill.
The other has £2,000 capital, £1,000 of which he wisely earmarks for the same purpose as the £1,000 which the other man set aside, using the other £1,000 as initial deposit in the acquisition of eight similar vehices on hire purchase.
The vehicles are all of the 30 m.p.h. type, and carry loads averaging 5 tons. The annual mileage of each is equivalent to an average of 500 per week. The total annual mileage of each fleet is thus 200,000. The operating costs of the vehicles reach approximately £4,500, and the gross annual revenue is £6,000.
There is thus a margin of £1,500 for gross profit. The overheads reach £800 per annum, and the net profit is thus £700 per annum. These are reasonable figures, in that they are capable of being reached in a well-managed business, doing the work which the annual mileage and the average loadings indicate.
It is possible to improve upon them but, on the other hand, I know many cases, similar in the details 01 operation, where the earnings fall considerably short of the amounts stated. In effect, I have quoted average figures, or what should be average figures.
The percentage earning on capital invested—£700 on 25,000 -is 14 per cent. That, incidentally, is a real net profit because there is an allowance, in the figures for operating costs, for interest on the capital spent on the vehicles. That allowance is about £180 per annum.
Now consider, in the same way, the case of the operator who buys his vehicles on the hire-purchase plan. The total of the hire-purchase charges he has to meet, assuming that he pays an initial deposit of onequarter of the purchaseprice of the vehicles, will approximate to 2240, less rather than more. That must be deducted from his earnings, so that the figure for riet profit, calculated as above, will be reduced from £700 to £460.
Now comes a curious thing. The profit of £460 has been earned on an initial capital of £2,000, which is at the rate of 23 per cent. per annum, as against the 14 per cent. per annum of the man Who uses, his own capital. to buy his vehicles It is also a fact, moreover, that this min, like the other, has made provision, in his vehicle-, operating costs, for the item. "interest," to the extent of £180.
• Respective Earnings Compared • Comparing the earnings of the two, and taking into account that not-insignificant item of £180 per annum, the respective earnings are : £880 in the case of the man who pays cash for his vehicles and 2640 in that of the haulier who takes advantage of the facilities of hire purchase. The former has invested a capital of £5,000, so that his return is actually at the rate of 17.6 per cent., and the latter, who has had to find capital of only 22,000, has a return at the rate of no less than 32 per cent.!
Further, if the man with the larger capital had chosen to invest his money in some sound industrial concern, instead of venturing into such a hazardous business as road haulage, he could probably have enjoyed an income of £200 per annum as the result of his choice. That means that he is getting only £680 per annum over and above what he might possibly have been receiving, without having to work for it. The second man could have received only about £80 per annum on his £2,000 if he had followed the same course and he is thus getting £560 per annum as the outcome of his enterprise.
S.T.R.