Advice for the Small Operator
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"The Commercial Motor" Costs Expert Describes a Simplified Method of Cost Recording and Rates Assessment, with Reference to Brick Haulage, and Shows How a "Cut" Rate Can he Economic, Although it May not Appear to be
ALARGg number of inquires I received during the Commercial Motor Show related tir cost recording. My copy • of "'Cost Recording Made Easy" did yeoman service in dealing with these matters; and the methods described , in the book were generally approved. One man told me that he had been keeping records in the way recommended since the book was published and was most satisfied with the results.
Some of the inquirers, however, could not be persuaded
that the methods described were easy: at least they asked if it were not possible to devise some which involved fewer calculations.. Some: years ago I designed a scheme for the operator. with .pnly one or two vehicles, certainly not more than 'four, and it may be worthwhile to describe it again.
' the'first thing to do in the records is to ph:wide spaces for
the weekly 'entry Of hours worked; miles rub,, and the expenditure on fuel and oil. Next; .proceed as follows:take the fuel cost per week and the oil cost; divide each by the number of miles run during the week and the cost per mile for fuel and oil is obtained. After, a few months, the average will be apparent. The procesi should nevertheless continue week by week as a check. Take the figures for cost of tyres, maintenance and depreciation from The Commercial Motor" Tables of Operating Costs.
The addition of the above items gives the total running costs per mile. As a check, refer again to the Tables. The standing charges should next be considered. First, there is the Road Fund Tax: divide the annual expenditure by 50not 52-and set down the amount. Similarly with the vehicle insurance premium. Then come garage rent and interest on the purchase price of the vehicle at 3 per cent.: The final item is wages. ..• .
One more item which is neither a running-cost figure nor a standing charge against the Vehrele is establishment 'costs. For this an operator in a small way of business sbouldallow 10s. per ton of payload. If he runs a tittle office, uses a car and be mostly engaged on supervision he should allow 12s. 6d. per ton of payload.
Finding Hourly Cost
Add the standing charges and the establishment costs and divide the number of hours worked by the driver during the week. The result is the fixed cost per hour. The haulier is now in possession of accurate information as to the cost per mile and per hour of operating his vehicle. If a job takes 6 hours and the vehicle runs 60 miles during that time the cost-not the charge or the rate-is six times the figure per hour and 60 times that per mile.
It is of interest to apply this method to a typical vehicle, an oiler of 6 tons capacity. Suppose that in a week it has ' run 400 miles and consumed 24 gallons of oil fuel at a cost of 3s. 9d. per gallon. The expenditure on fuel will be £4 10s. Dividing £4 10s. by 400 gives 2.70d., the cost per mile for fuel. The figure for lubricating oil similarly calculated comes out at 0.07d.
The other running-cost items 'canbe taken direct from the Tables. They are:-tyres," 1.81)d.; maintenance (d) and (e) together, 1.89d.;' depreciation, 2.98d. The total of running costs per mile is thus 9.44d. say 91c1., made up of the foregoing.
Now for the standing charges: the tax on a tipping vehicle will be £35 per anntlm, which is 14s. per week. Insurance in the case of a haulage contractor having only one or two vehicles maybe £50 per annum per vehicle or 'ft per week. Take garage rent at 10s. and then add the interest at 3 per .cent. on £1,000, which is 12s. per week.
• The wages paid in that week during Which, let me assume, the driver has worked 54 hours, are E8 3s. 3d. to'the nearest penny. After that must .be added provision for National Insurance, insurance under the Workmen's Compensation Act together with provision for holidays ,with pay; that is a further I Is. bringing the amount to be debited against wages to £8 14s. 3d.
I have already referred to establishment costs which should be 10s. or 12s. 6d. per ton of payload according to the operator's circumstances.. I propose to take 10s. The total of fixed charges, that it, standing charges plus establishment costs, is £14 10s. 3d. which, spread over the 54 hours, is approximately 5s. 4d. per hour.
" The bPerator now has those two figures-5a. 4d.-per hour and W. per mile. These are all that are necessary to enable him to ascertain the net cost of any particular job, assuming that the conditions remain approximately the same week by Week, as they are likely to.
Charging for Job
As an example, suppose that with this 6-ton vehicle he carried bricks over a, 30-mile lead and took 2,500 bricks per journey. The Work occupied 5:hours: that included provision for loading and unloading and travelling time: 5 hours at 5s. 4d. is £1 6s. 8d. In addition he must charge for 60 miles at 90., which is £2 7s. 6d. The cost of operation of that vehicle while on that particular job is thus £3 14s. 2d., which is equivalent to 29s. 8d., say .30s. per 1,000 bricks.
So far, I have given figures for cost alone, and in so doing have achieved my principal object in writing this Esiticle for those who have no experience of the cost of operating a vehicle and still less of what they should charge. My Object is simply to instil into the mind of the operator thatwithout, any profit at all he must charge 30s. per 1,000 for the carriage of those bricks, and that for any other job his ,vehicle costs 5s. 4d. per' hour and .91d. per mile. He must get much more than these amounts if he be going to make a profit. So far as the above example is concerned, we can add 20 per cent, for profit., so that the charge must be not less than £1 16s. per 1,000 bricks.
I have always contended that the best deterrent to ratecutting is knowledge of costs. The hauliers who will deliberately quote a rite which will recoup only the operating expenditure must be few. Considering the matter in that light, it might be better to deal with costs and revenues on a weekly basis. So far as this 6-tonner is concerned, the expenditure is in•the first place £14 10s. 3d. per week-that is for standing charges and establishment costs-plus 9141.. multiplied by the mileage run.
If that be480, the total weekly cost is £14 10s. 3d. plus £19, £33 10a; 3d. No haulier who has these figures before him will continue to operate at rates which arc bringing him inadequate revenue. If, as the outcome of keeping records of his costs in the simple way I have just recommended, he finds that the total week by week is less or little more than £33 10s. 3d., he will be anxious to bring about some revision of his charges as soon as possible.
For example, if he be carrying bricks on a 30-mile lead at £1 10s. per 1,000, his revenue in a week of 54 hours will be for 10 loads of 2,500 bricks each £37 10s., showing about only £4 per week profit. The haulier will either press for an i increase 'n the rate Or go elsewhere for his traffic. Or he may buy bigger vehicles which are often more economical to operate per ton of payload. • • He will certainly do something to get away from this uneconomical rate and will be inclined to press for the £1 16s. per 1,000 as calculated above. If he be successful in obtaining that rate, his weekly revenue will be £45, showing a net profit of £11 9s. 9d.
To brand as rate-cutting any quotation which does not reach £1 16s. per 1,000 would be wrong unless there were an area agreement that this was the proper charge for a 30-mile lead. When a rate has been agreed, it is ratecutting to quote below it. If there be no agreement, the haulier may charge as he pleases; he is rate-cutting only if he charges less than ,the economic rate, that is to say which does not cover his total cost and bring in a profit.
It is not rate-cutting on the part of a haulier if he charges less than a competitor, provided he makes a reasonable profit. That is one of the inevitable results of free competition, and because I have this week been accused of condoning and even encouraging rate-cutting 1 would like to carry the matter a little further.
This is the interpretation of :he term b the average haulier, and particularly by the type who rarely ever attends the meetings of the local area of the Road Haulage Association. If a haulier, whom I will call A, be carrying traffic at £2 per ton and a competitor, B, puts in a quotation of £1 18s. per ton, A will complain that B is cutting his rate. The operative word in that sentence is "his." It is agreed that B is cutting A's rate, but it does not follow that B can fairly be charged with rate-cutting so long as the rate is economic to him.
If the total cost of operating the vehicle be less than its earnings then, subject .always to the condition that there must be no agreed schedule of rates prevailing, if the revenue exceeds the cost so that the operator is making a reasonable net profit he cannot be charged with rate-cutting. The point which is often overlooked is that one haulier may be in a favourable position as regards his costs compared with another. Each may make bona fide quotations and the profit to be earned may be the same for each, notwithstanding that there is a difference in the rates. Before nationalization there were two operators who were in competition in the sort of way liable to lead to complaints about rate-cutting. One had 14 vehicles comprising 140 tons of payload; the other had two 8-tanners. The big operator ran trunk services and had offices in Manchester, Cardiff and London. There were three active partners and a fairly well paid staff. The other, whilst he operated over the same routes, did so without needing to go to the expense of offices anywhere. He and his partner drove the two oilers and were sufficiently expert in getting traffic that they were able to manage without any further assistance.
1,000 Miles a Week
A typical week's work with an 8-tonner in the fleet of the larger operator would involve 1,000 miles of running. The operating cost was Is. Oid. per mile and the cost per week £52 Is. 8d. The overheads of this larger operator were as set out in the first column of Table I and totalled £4,906 17s. 3d., equivalent to 14s. per ton of payload, which was equivalent to £5 12s. per week for each vehicle. Drivers' expenses totalled £2 18s. 4d. per week, so that the total outgoings for each vehicle comprised £52 Is. 8d. operating costs, £5 12s. establishment costs and £2 18s. 4d. expenses, amounting to £60 12s.
Full loads were carried on the outward journeys and on 75 per cent. of the return trips. The rate per ton was £2 10s., bringing a revenue from 30 tons of traffic of £75. Now let us turn to Table I where the establishment costs of these two operators are compared. Those of the bigger man need no consideration, but those of the smaller operator need a little scrutiny.
In the first place, there was nothing to go down under the first two items, office rent and office rates. His office was merely a partitioned-off corner of the garage and he paid less thin £1 per week garage rent in all. He did not spend much on lighting, probably 42 10s. per quarter in the winter and 10s. in the summer, making a total of £6 per annum. For heating, all that he had was a coke stove and I do not suppose he spent more than £3 10s. per year on that. His water cost him £1 13s. per annum. For his telephone bill, I think £16 10s. would suffice, and I should imagine that if he paid his auditor £3 3s. fat his annual audit he thought he was being extravagant As regards law costs, I do not suppose he had any. On sundries, for which the bigger man had to pay E363, our man would not have spent more than £5. I can put down £2 10s. a year for fines. So far as travelling expenses are concerned, we will put down £100 2s.
Clerical wages were the next item, and there was nothing to go downfor those because he did all the work himself. For the same reason the next item, National Insurance stamps (clerical) was also nil. We will put down £100 per annum for directors' fees. There was little on account of depreciation on garage fixtures. He had nothing but a fuel pump and a small compressor for tyre inflation: II 10s. per annum should be enough for that.
For bank charges I take £6 per annum and for expenditure on ferries, weighbridges, parking and the like £6 10s. per annum. He always bought his vehicles for cash so there was no interest on hire-purchase to be dealt with. Printing and stationery cost him at the most £10 10s. per annum. Fire insurance was not more than El 10s. per annum. He did not spend anything on maintenance of buildings; apparently he was able to make the landlord do what little was done.
I had rio knowledge of his liability to bad debts, but I should think £2 10s. per annum would have covered it. Against, the item for interest on capital invested in the business I have, put down £6; another £6 for postage, and
£3 for A and B licences. He-spent nothing on advertising, but there was £10 to go down for goods-in-transit insurance. The total was £291 18s.
That was for 16 tons of payload, nearly ,£19 per ton of payload per annum, or approximately 7s. 6d per ton per week, little more than half what the big operator paid. It amounted to £3 per week for each of the two 8-tanners, compared with £5 12s. for the bigger operator..
That describes one factor in connection with the operation of these two businesses which would make it feasible for the small operator to charge a rate lower than his bigger competitor if he wished to do so, and he would make more
profit. S.T.R. (To be continued)