Cash in Hand
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Advice to a Potential Entrant to the Industry about the Various Items of Operating Expenditure for which he will have to Budget in Assessing his Haulage Charges
ASHORT time ago I had a letter from a would-be haulier. He wanted to know what he should earn per mile with a petrol-engined lorry. The work offered to him would involve 360 miles per week and he asked what he should charge his prospective customer per mile. The vehicle was a 6-tonner.
I wrote informing him that this charge should be 2s. and gave the following justification for the amount The cost of running your vehicle will approximate to Is. 6d. per mile or £27 per week. Your establishment charges will probably be about £3 per week and I assume that you will expect to earn not less than £6 per week net profit. Your total revenue per week must therefore be £27 plus £3 plus £6, total £36. Your charge per mile must therefore be 2s.
Now, if this correspondent happens to he a man fairly well equipped with business knowledge, not necessarily haulage business, he will have a good idea as to what these figures mean and how he stands in respect of weekly outlay. He will not, therefore, be greatly disturbed at the prospect. but will make such use of my information as circumstances may allow. That is to say, he will get the best price. he can, hearing in mind the fact that if he can obtain 2s. per mile he will make a profit of £6 per week, but that every penny below that figure per mile will mean 30s, per week less profit, so that if he gets only 4d. less, then he will earn no profit at all.
On the other hand, it. as in this case, the inquirer happens to be one of those who are just considering the purchase of one of the R.H.E. vehicles and have had no experience whatever of haulage, he will do as this man did, ask some supplementary questions.
He imagined that the figurq. I had sent to him meant that, in running the lorry, he would actually be involved in an outlay of £30 per week, that being made up of £27 per week operating costs plus £3 per week, establishment charges He added to that his domestic expenditure which, for the sake of argument, I will assume to be £6 per week, and had come to the conclusion that he would have to and upwards of £36 per week for some four or five weeks, which is probably the least time that would elapse between the time of his setting out to do the work and payment being made by the customer.
Reading between the lines of his letter I gathered that, after paying for the vehicle and providing for garage, etc.. A34 he would have practically nothing left. If he had had a couple of hundred pounds in hand he would not have worried and 1 would probably not have heard from him again. I-k would have made such provision as he could before taking delivery of the machine and would have let it go at that.
This inquirer was evidently not in that fortunate position, and he was, accordingly, rather worried.
Now there are almost certain to be hundreds of men with a minimum of capital who are thinking along these lines, and that makes it advisable to look at the matter from this new angle and see what can be done to help. For the moment all that is really needed is an amplification of my previous statement. and I propose to give this.
It will be convenient to take as an example the one represented by the opening paragraphs of this article, namely a start with a single vehicle of 6-ton capacity. For my first amplification I will assume that the vehicle is purchased for cash, in order to eliminate some of the complications which would arise if the machine was acquired through a hire-purchase transaction.
By the time the vehicle is ready for use, the insurance £36 and the tax, £35, will be paid and there will be no need for any further expenditure on those two items for a year to come.
Weekly Outlay Now, what we want is some information as to the actual outlay per week. If, as in this case, the intending haulier has a contract in view, one upon Which he will commence work immediately, one which will, for a time at least, absorb all his energies and keep the lorry running for 360 miles per week, then for the time being the expenditure On what I have called establishment costs will be small. A telephone will be installed and some bill-heads purchased, designed to be useful also as notepaper, and sundries. The total outlay should not exceed an average of £4 all told.
Assuming that the vehicle is fairly new and is in good shape, then it should be economical both in petrol and oil consumption. It may be that the owner-driver will obain 9-10 m.p.g. on petrol and upwards of 750 m.p.g. of lubricating oil. For a week, then, he will need 36 to 40 gal. of petrol and 2 quarts of oil. If.he has to pay 4s. 2d. per gallon for petrol his expenditure per week will be from £7 15s. to £8 5s., of which 5s. will be for engine oil. That should be all in the way of running costs, for nothing should be needed on account of the other items. tyres. maintenance and depreciation, for some lime to come.
As far as standing charges are concerned, there is only one thing to be considered, that is garage rent. This may be anything from nil to 15s. per week, according to circumstances. A man living in the country, with probably an outhouse or shed at his disposal, will not have to spend
anything beyond house rent, in that respect. He has already paid the insurance premium and Road Fund tax.
Interest is, as I have many times explained in these columns, a negative expenditure and for the moment I am assuming that the new owner will drive the vehicle himself, so that, in the beginning, he will not have to find money for wages. He has still, however, to find money to keep his home going; beyond that, nothing more, at any rate for the time being. An explanation of that follows.
If all these weekly items are added together the total, including £6 per week for household expenses, comes to £14 10s, and that includes a possible 10s. per week for garage rent. In a month that will amount to about £60 and this sum would be enough to enable him to carry on through the first month. If the customer is a bad payer and the haulier has to wait two or three months for his money, the provision for starting the business will have to be increased accordingly.
No Further Worries
Assuming, quite reasonably that the customer pays regularly by the month, then at the end of a complete month's work he should receive about £150. Out of that he can provide for the expense incurred during that month, have £90 to carry on with and will have a little in hand to pay for the third month's outgoings. From that time he should have no further worries about cash and I only hope that he will not find this an excuse for cutting rates, for the margin of profit allowance in the above figures is no more than reasonable. I regard it as the absolute minimum.
It is, as a matter of fact, at this stage that so many ignorant hauliers make their first big mistake. It can be big enough to put a man out of business and it is, therefore, all the more necessary to refer to it in no uncertain terms.
Having run for, say, a month and found that, as the result of his labours he has £90. or so in pocket, he is apt to imagine that this represents a month's profit. He imagines that, month after month he will be putting £90 away and that at the end of the year he will have a clear £1,000 in the bank—and all expenses paid. That of course is wrong and it is chiefly to prevent these newcomers from falling into that error that 1 am always so careful to include every item in making an estimate of costs or preparing a scale of charges.
State of Business
seriously suggest to every newcomer to this business that he should try to imagine what is going to be the state of his business, and more particularly of his vehicle at the end of its first year—if it runs for that time without calling tar some expenditure on maintenance. He should try to assess what it will cost to keep that vehicle going, week after week, running 360 miles per week, for a year.
In the first place, the total mileage is about 18.000. He may get through the year without having to buy some new tyres. Whether that comes about or not depends on the sort of work that the vehicle is doing, also upon the way it is driven. The engine will almost certainly need a topoverhaul once during that time and possibly a more thorough overhaul. Again the kind of work the vehicle is doing is a faetor in that.
It may not be absolutely necessary—we all read of vehicles running for 50,000 miles and more without needing any attention at all—but it will be cheaper to have that overhaul carried out there and then rather than to carry on and perhaps have to pay the cost of several overhauls when some breakdown occurs as the result of neglect.
During the year, too, there will have been sundry expenses from time to time, brought about by the use of the lorry. It will have to be cleaned and polished, a touch up here and there of the paintwork may he necessary, a new set of sparking plugs will, no doubt, have been fitted, several lamp bulbs, and a dozen or more other small items will have been purchased.
All these, including the overhauls. come under the heading of maintenance and, although the cost per mile under these headings may not be so much as is stated in "'The Commercial Motor' Tables of Operating Costs." that will only be because the lorry is in its first year. when such expenditure is naturally at a minimum. The items grow and increase in cost as the lorry ages, until there comes a time when the actual cost per mile is greater than that given in the Tables.
To return to our haulier's immediate problem. the lorry itself is now one year old. It will not go on for ever and certainly not for as long as he expects his business to continue in being. The time will inevitably come when a new lorry will have to be bought. Provision must be made for that eventuality during the time that the vehicle is in operation and it should not be delayed until the time for renewal is at hand. If the provision, for depreciation be delayed too long, then when the replacement of the vehicle becomes a matter of urgency there will be nothing in the kitty to pay for it That provision is what is really meant by the term depreciation: treated in that way, and if there is no disturbance of the fund thus provided, then, when the time for renewal comes, the money will be there and the new machine can be bought for cash with practically no disturbance of the haulier's normal habit of working.
As to what that amount may be, let me produce some figures. The lorry itself would have cost about £1,200. If it be agreed that the life of the vehicle should be taken at 150,000 miles, then it is "dying" at the rate of nearly 2d. per mile. It has run 18.000 miles during its first year, so that £150 of its value is spent. That is the amount which should be put away and dedicated to the depreciation fund, not to be touched or used for any other purpose.
Future Expansion
By this time, of course, the licence must be renewed and the insurance premium duly paid. The amount involved is £71, £36 for insurance and £35 for tax. These are among the items that the new operator is apt to forget. In the near future, too, the question of wages will have to be given consideration, for if the first venture is successful, surely the urge to add another machine to the " fleet " will make itself felt. Because the owner cannot drive both vehicles, he will have to engage a driver for the second vehicle and the item " wages " will then make itself evident in no uncertain way. I do not propose to enlarge upon that aspect of the matter: I have, in fact, except for one thing, shown that entry into the haulage business may not involve the use of a considerable sum, except for that involved in the purchase of the vehicle itself. The thing that I have not dealt with but must, is the consideration of the position which arises when the vehicle is acquired on a hire-purchase agreement. It should be borne in mind that the purpose of this article is simply to demonstrate to the newcomer to haulage that he is not actually deeply involved in expenditure during the first year, certainly not sufficient to eat away all his revenue. So far I have shown that, for a year, his monthly expenditure need be no more than £60, whereas, when his account is paid, he should be in receipt of £150 each month. I have been careful to point out that all that balance of £90 is not profit, merely demonstrating that there is sufficient regular revenue coming in each month to enable the operator to pay his way.
Sufficient Revenue
The last problem is that of providing for the hire-purchase instalments in addition to the expenses already itemized. It has been assumed that the cash price of the vehicle is £1,200. It may also be taken that, if it is bought through a hire-purchase deal, the initial payment will be about £400, and it is further understood that the operator has sufficient capital in hand to provide for that. The balance. including the charges, will be 1900 and if the period of the hire is 18 months, then the haulier will have to find £50 per month on that account. As he is, if he has followed my advice and obtained the rate I recommended, in possession of £90 per month the hire-purchase instalments will not trouble him. What he must do, and this is important, is to debit his monthfy revenue with that £50 and remember that the money, as to most of it at any rate, must be paid back into his depreciation and other funds as soon as his contract with the hire-purchase company ends. S.T.R.