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Keep Costs Carefully

6th April 1956, Page 34
6th April 1956
Page 34
Page 35
Page 34, 6th April 1956 — Keep Costs Carefully
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Which of the following most accurately describes the problem?

Does a Big Operator Save on Overheads, or Is the Small Man at an Advantage? This Article Shows How Expenses Vary According to the Size of Fleet

THERE is a special significance in a letter I have before me just now. The writer says that on October 10 last year he started to keep records of the cost of operating his vehicles. "1 now understand why I have been in the haulage business since 1932 and have never made much money," he says.

I gathered that his problem arises out of his lack of provision for establishment costs. An important aspect of this subject is its effect on costs as involved in large and small fleets. There is an impression abroad that the big operator saves on his establishment expenses and can thus undercut the rates which the small man must quote if he is to make profits. On the other hand, it is often said that the small man is advantageously placed because his overheads are low. The real fact is that all depends upon the efficiency in the use of the money spent on establishment costs.

There are three factors which much be taken into consideration: (a) the cost of operating the vehicles; (b) the cost of running the business; and (c) profit, free from all allowances. A haulier may state that he has made what he calls a clear profit of £5 per week per vehicle. When, however, 1 go into details, I nearly always find that there is this amount and that to be taken off, and the whittlingdown process often goes on to such a degree that the actual profit is no more than £2 or even £1.

These allowances, the "this and that" to which I have referred, are all what I have termed "cost of running the business " or. otherwise, establishment costs. Most small hauliers aver that they are subject to no establishment costs. It is certainly true that, in some cases, these costs are low.

A32 They are, however, never non-existent, not even negligible: sometimes they are substantial. It is difficult to estimate the amount of establishment costs. Only the man who keeps accurate records of every halfpenny he spends on his business can say what they actually are.

I am going to try to deal with these costs in the same way as vehicle-operating costs, first assessing them at a

maximum, then at a minimum—and, finally, citing some intermediate cases. Especially I am going to try to

discover whether these costs vary in proportion to the size of the fleet, whether they grow in proportion with the fleet or are otherwise related to the scope of the enterprise of the individual operator.

First, I should state that I have just examined the books of an operator of 24 vehicles of various sizes. He is a haulier who does keep track of his costs in the way I have so often recommended. I should go further and say that, from the point of view of road transport economics and organization, his accounts are the best and most useful and informative of any I have seen.

Annual Allotment

The total of his establishment costs is £1,800. Assuming —as is not the case—that the vehicles are all of the same size, each would have to be debited with £75 per annum, £1 10s. per week, or 8d. per hour to the nearest farthing. This figure is far from being a maximum. Indeed, it is not far from being a reasonable average.

In Table 1, I have set out the schedule of items of establishment costs, such as are likely to appear in the accounts of a large operator. I have also indicated the amounts that are likely to be involved in respect of each of those items. So far as the items themselves are concerned, the list will no doubt appear to many readers to be overlong. My own feeling is that, if I have made errors, they are errors of omission rather than of commission.

So far as the amounts are concerned, it is impossible to avoid making a plea for a certain amount of licence. Some of the items may be far below the amounts a particular operator will have to find, but that deficiency will, I think, be balanced by increases under other headings.

Most of the items need no explanation. Looking down the list, and having in mind the actual amounts scheduled, the first likely to call for comment is that of legal expenses. At £120, that item is probably underestimated. Certain operators can quote much higher figures.

Provision for Storage

The provision for storage is one which no sizeable operator can avoid. If anything, I have again underestimated the amount set down for labour: especially is that the case if there is a certain amount of clearing house business done.

There are three items which go together, namely expenditure on branch establishments, commission and agency fees and salesman's wages and commissions. Doubt may be raised as to whether all three of these would be involved, except in rare instances. I can only state that they do exist in this particular example and, therefore, as this schedule purports to be one of maximum amount, I am bound to include them.

Next comes the question of allocation of the total among the vehicles of the fleet. Opinion is not unanimous as to correct procedure, but the majority is in agreement with the method that I have followed, that is to say, of allotting

the establishment costs in proportion to the load capacity of the vehicles.

Table II gives details of a fleet in respect of load capacity, and the third column sets out the total tonnage capacity of each group of a particular size. The grand total of that capacity is 900 tons. If that figure is divided into the total amount of the establishment costs, namely £5,940, the amount per ton is seen to be £6 12s.

The 15-ton vehicles must, therefore, be debited with 11 times £6 12s., which is £99 per annum. Similarly, the 12-tonner must carry a burden of £79 45. on this account, and so on. The figures are set out per annum, per week and per hour in Table 111.

Great Disparity Examining this table, it may seem. to readers that in comparing establishment costs for a: .15-tonner with those of a 1-tonner, there, is great disparity:. It may seem that £6 12s. is too little for the 1-tonner. .1f, however, the matter is considered from the point of earning capacity, opinion will veer to the other direction—that the larger vehicles should carry a larger share of establishment costs. In all probability, the 1-tonners are a debt, that is to say they really earn nothing directly and serve only as errand boys to the whole fleet.

It may be as well to issue a warning here, especially to those unfamiliar with these matters. They must not take the figures given in this article, and in the three tables which accompany it, as generally applicable to the site of the vehicle named.

I have emphasized that the data quoted in this article are maxima: now I propose to deal with a case in which the establishment costs are at a minimum. Whilst the ownerdriver appears to be the class of haulier likely to incur the least possible expenditure on this account, it will, I think, he more useful to consider the case of a man owning more than one vehicle and who does not go to the expense of employing a manager.

What class of haulier is likely to be put to the least possible expenditure in respect of establishment costs? Leaving out the owner-driver who, as I have already pointed out, ought to be treated as a class apart, 1 should perhaps emphasize that I do not make that remark unkindly.

I think I must take the case of a haulier with rather more responsibilities than normally fall to the lot of the owner-driver and, in my opinion, those conditions are best met by the case of a man having not fewer than three vehicles and employing three drivers. This implies that the haulier himself acts in the capacity of manager. The class of work which, I think, most nearly meets our requirements in this particular respect is that of the haulage of sand and ballast over a comparatively limited area, The establishment costs in such a business should be low. It is of interest to run through the schedule of establishment costs enumerated in Table I. In so doing I should itemize those costs which cannot, in some degree or other, be avoided by an operator in this position.

He must have a-telephone, even if its main use is for the receipt of incoming calls from his drivers advising the operator that one of his vehicles has broken down, met with an accident, or something of that kind. The expense of those incoming calls will, of course, appear as extra to his own telephone bill. There are thus two items which cannot be avoided.

Bank Charges

He will be at some expense on account of stationery. He will have to spend something on postage, including stamps on receipts. There will be bank charges to meet. The item "management" is inescapable, for he will have to pay himself a wage, however nominal, as manager. It may be that he will do without the assistance of a clerk, and that he will have no definite office, probably conducting such office business as is necessary from his own house or from a boarded-off corner in the garage. '

Strictly speaking, he ought to debit his business with something on that account, but as we are discussing minimum establishment costs, we may fairly omit that item. He will nevertheless have to spend money on heating and lighting his "office," whatever it may be, and there will be something, however small, on account of office equipment although it may be but a second-hand typewriter. The haulier will definitely have to face expenditure arising from procedure Under the Roadand Rail Traffic Acts, and 1 can hardly imagine him carrying On for long Without some legal expense or other. If he is wise, he will be a Member of the Road Haulage Association, It will not be long before he appreciates the wisdoni of taking at least One trade paper, because it is only by regular reading that he will be able to keep himself acquainted with what is going on in the transport world,„ with the introduction of new regulations and with altering conditions with which he must comply if he is going to be able to keep his licences,

He will most likely have travelling expenses and may need a car to travel about in to see his customers. In this business there will be no need for insurance of the load: a goods-intransit policy will be unnecessary. . The only .item still remaining out of the long list of items in Table I is that of bad debts, I will deal with the amounts likely to be involved in my next article. . .

The important thing to emphasize at this stage is the necessity of keeping a careful record of all money spent. No matter how small the business may be, time spent on a' costing analysis is never wasted. S.T.R.

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Organisations: Road Haulage Association

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