The Simplest Way c KEEPING HAUI GE ACCOUNTS
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Showing, in Detail, How "The Commercial Motor" Operating Costs Record Can be Applied so as to Give the Small Operator All the Information He Needs for Costing and for Ascertaining
Rates and Charges
IN the previous article I showed that four out of five 'standing charges could be assessed immediately upon the purchase of a vehicle and would remain unaffected. They are the licence, garage rent, insurance premium and interest. I also showed that in the case of a 5-ton 30 m.p.h. vehicle the items were, per week, 12s., 10s., 15s., and 5s. 9d. respectively, totalling 22 2s. 9d.
I also emphasized that of the five running-cost items, estimates had to be prepared for three of them—tyres, maintenance and depreciation. In the case of this same type of vehicle I had arrived at a figure of 0.75d. per mile for tyres and 1.20d. for maintenance, indicating how those estimates were reached. There is still depreciation to be considered.
At the present time there is a peculiar difficulty about depreciation, in this way. I have always said that depreciation, so far as it is to be considered an item of operating costs, is sotnething which is to be set aside towards the purchase of a new vehicle, In assessing it, therefore, the probable cost of a new vehicle must be the basis, rather than the price paid for the one actually in use.
An Addition to the Estimated Figure for Depreciation
In normal times, there is not any appreciable difference. To-day, the difference is so great that I have not even dared to make full .allowance for it. All that I have done is to add 10 per cent, to the figure arrived at in the ordinary way of estimating depreciation. It is, however, the method, rather than the figure, which is of importance just now.
I have said that the net capital cost of this vehicle is 2360. For this type a life of 100,000 miles is assumed, at the end of which time the operator may obtain something for the vehicle in part, exchange for a new one. Assume that he obtains 245, then the balance of 2315 has to be divided by 100,000, which gives as near as needs be 0.75d. Adding 10 per cent, to that brings my figure to 0.83d., which, once again, is the figure appearing in The Commercial Motor Tables of Operating Costs.
The total of these three estimated items is 2.78d. per mile. Here, again, the operator should keep the figure in mind as being the amount he should set aside, for every mile the vehicle runs, towards future as well as current expenditure on tyres, maintenance and replacement of rolling stock.
In the simplest system of costing these two sets of figures must first be calculated as described. It should be noted that the calculations need be made only once and need not be repeated for, at least, a couple of years. How the figures are used may now be shown. ,
Reproduced with this article is a specimen page from The Commercial Motor Operating Costs Record, the particularly simple system to which I have referred in pre
vious articles. The illustration is approximately onequarter the size of the original. Each page provides :or entries relating to one week's work for two vehicles. If the operator has only one machine he could make the one page do for two weeks by using the date column twice and entering the record of the second week's work on the righthand of the page.
The upper part of the page is our first concern. It provides for the entry of details of the work done by the vehicle in respect of time and mileage and for the record of the consumption of petrol and oil. Every operator must have these figures. Those relating to time and mileage are on the driver's log sheet and there surely cannot be anyone in the industry who does not note his consumption of petrol .and oil. All that is required, therefore, so far as the upper part of the page is concerned, is for the entry of these items. and for that very little time is required.
At the end of the week a little more time is required. First, the four columns already filled in must be totalled. In the example shown the totals for the week are 792 miles, 62 hours, 75 gallons of petrol, 3 pints of oil.
These are, of course, quantities, not costs, which are dealt with in the lower half of the page, to which now turn. It is divided into running costs and standing charges, the two series of items for which provision must be made in any system of recording operating costs,
First, as to running Costs. The petrol consumption during the, week was 75 gallons; the cost of that quantity of fuel must be recorded. In the case of the example illustrated it is assumed that the price of petrol is 2s. per gallon, so that the cost is 27 105. Similarly, the three pints of oil, at •8c1. per pint, cost 2s.
Need for Making Provision for Future Expenditure
So far, only two of the five items of running costs have been accounted for. There are still tyres, maintenance and depreciation. The operator has probably spent little on these during the week with which we are concerned. What he must do is to make provision for future expenditure and that, as has already been shown, must be at the rate of 0.75d. per mile for tyres, 1.20d. for maintenance and 0.83d. for depreciation—total 2.78d. per mile.
For 792 'miles the total cost must, of course, be that number multiplied by 2.78d. and that is 29 3s. 6d. for the week. This means that the operator should set aside that sum, less anything he may actually have spent during the week, for future expenditure, and it must be allocated— as to 22 9s. 6d. for tyres, 23 19s. 3d. for maintenance and £2 14s. 9d. for depreciation, towards the purchase of a new vehicle.
These amounts may seem high, especially to those operators who have never kept records of all their expenditure, and, therefore, do not realize what that expenditure may amount to, particularly in relation to tyres and maintenance, throughout the whole life of the vehicle. They have not yet come to appreciate how the expenditure -per mile increases, at first gradually and then more rapidly, as the vehicle grows older. In this system we are making • provision at the beginning for what will have to be spent towards the end.
Some hauliers may find that they can improve upon these estimates by not spending so much on tyres and maintenance as is suggested by these figures. On the other hand, there are many who will not be able to show such good results. I have before me some of the figures for the operation-of a 3-ton lorry and, for purposes of 'comparison, it is interesting to note that the expenditure on tyres for this smaller vehicle is no less than 1:6d. per mile, that is to say, more than twice as much as the amount for which provision is made in this example, This operator's expenditure on maintenance and his figure for depreciation are probably in proportion to his tyre costs. He operates, I know, in a mountainous district where the roads are bad.
The cost of operating a similar vehicle in fiat country, where there are good roads, would probably be much less than the above estunates. Later, for the benefit of those who desire greater accuracy in the .figures for operating costs, I shall show how to correct these estimates, so far as that is practicable; in order to bring them more in line with the actualities of' any individual case. For the time being, the figures may stand. At the very least they fulfil our, requirements.
The total of running costs is sholvn to be £16 15s. 6d. If that be divided by the number of miles which the vehicle has run, namely, 792, the cost per mile is ascertained. It is 5.08d., which, as near as makes no matter, is tid. per mile.
Now, to consider the standing charges which remain practically unaltered throughout the life of the vehicle. As already indicated they total, in relation to the 5-ton van taken as an example, £2 2s. 9d.
Items Not to be Overlooked in Wages Entries The next item, which is the filth of the five standing charges, is wages. That the operator will enter from his books, but he should take care to include, in the amount which he sets down, what his expenditure has been in respect of National Unemployment Insurance, National Health Insurance and weekly proportion of the annual premium which he pays to insure against risks under the 'Workmen's Compensation Act. Without those figures his schedule is not complete. The total is RI 13s. 7d. That must be divided by the 62 hours which the vehicle has worked, in order to ascertain the amount of the standing charges per hour, namely,. 2s, 6d.
Already, the operator has two important figures available, his time and mileage charges for the operation of this vehicle, namely. 29: 6d. per hour for time and 5d. per mile.
It is also advisable for him to know his total operating costs. That can be ascertained by adding together the total of the running costs, £16 15s. 6d., to the total of the standing charges, £7 13s, 7d., giving £24 9s. Id.
These figures are a close approximation to the real operating costs of the vehicle, with provision for each and every one of the 10 items of cost. They can be used in a variety of ways by a small operator. He can employ them to check his revenues and as a basis for his rates and charges. In checking them against his revenue he should find that there -is a margin between cost and revenue, the latter, of course, being the greater. He should bear in mind that the margin must be sufficient to cover his expenditure on establishment costs, as well as show him a reasonable profit.
The operator who adopts this simple system of recording his vehicle operating 'costs may not think it worth while keeping a note of his establishment costs. He should do, ot course, and it is certain that be will have no idea what they really total if he does not. If he be asked what they amount to his estimate will be fai below what the total actually is, In relation to the case of the 3-tonner, which I have already mentioned, the operator estimates his establishment costs as being 5s. pc.fweek. Now, my own figures, gathered from a variety of sources, show that, apart from exceptional cases, establishment costs amount, in rural districts, to 7s. 6d. per ton of pay-load, in provincial industrial areas to 10s. per ton of pay-load, and in London to 12s. 6d. per ton of pay-load. These are peace-time figures and are below what is now being experienced by most operators.
Applying these peace-time totals to the case we have in mind—a vehicle which, by the amount of wages, is, obviously,' one operating in an industrial area—the provision for establishment costs, at the rate of 10s. per week per ton of pay-load must be £2 10s. The total cost, which comprises Vehicle operating costs plus establishment costs is, thus, £24 9s. Id., plus £2 10s., making £26 19s. Id. It would be quite near enough to take that total as £27.
What the Operator Should Allow In Respect of Profit
Provision for profit must still be made. That should not be less than 20 per cent. of the expenditure involved. One-fifth of £27 is £5 Ss., so that the minimum revenue* which the operator should earn is £32 8s.
There is, as a matter of fact, a short cut to this figure of total revenue which accords more nearly with one of the purposes of this system of costs records, namely, simplicity. The total must be large enough to allow for establishment costs plus profit. Add one-third of the total expenditure on operating costs and the total revenue will result; in 'this case it means that we must achl one-third of £24 9s. Id., which is £8 3s. Adding the two we get £32 12s. Id., which is not much different from the amount arrived at by the more usual method of assessing establishment costs and adding an agreed percentage for profit.
At any rate, I lay it down as a general rule that operators utilizing this simple system of recording operating costs should add 33f per cent., or one-third, of the total Of operating costs as shown at the bottom of the sheet, that being the revenue which must be earned during the week if the business be showing-a fair and proper return. The point to bear in mind is that the operator, week by week, should compare the figure thus ascertained with the money he is actually earning. If his earnings fall short of the figure thus discovered, then he should realize that the rates he is obtaining are not what he should get, or, alternatively, he may not be operating his business efficiently enough. In either case it is up to him to take steps rilo remedy matters, so as to bring his actual revenue up to that
which it should be. S.T.R.