Be Wise to DEPRECIATION
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There is No Reason to Dismiss this Important Item of Cost If a Vehicle is Being Purchased Under a Hirepurchase Agreement: Accurate Accounts are Essential
IN my article last week I started to recount a conversation with an owner-driver, who told me that he had entered into a contract to carry timber from Bristol to Manchester at what he wrongly conceived to be a profitable rate, 35s. per ton. Asked how he obtained the job and how the rate was calculated, he told me that he knew that another haulier was doing the job at £2 per ton and quoted 35s. to net the job.
I told him that this was perhaps the worst case of rate-cutting 1 had ever met and proceeded to show him where he was wrong.
I did not need to search very far into his accounts, for I found that he had nothing downfor maintenance in his statement of costs. As this was unprecedented, I went carefully into the question of maintenance and showed that according to my reckoning the cost per mile for routine operations amounted to a sum of 0.68d., whilst the more expensive operations, including engine reconditioning and a major overhaul, would be I.22d. The total cost of maintenance is thus seen to be 1.90d., probably 2d. per mile if I add a little for contingencies.
Routine Work I allowed him to take credit for the routine work as being what he could do for himself: I called it maintenance "d," as in "'The Commercial Motor' Tables of Operating Costs" and, taking the cost at 0.70d. per mile, this left 1.30d. as the expenditure he would have to record against the running cost of the vehicle.
It was at this point that I terminated last week's article. I thought I had convinced him about the cost of maintenance. I was a little dubious about his ability to do all the maintenance "d" work, but was ready to let it go at that when he raised a point himself. It was about decarbonizing: that work had been scheduled as maintenance "e," generally to be regarded as beyond the scope of a driver or owner-driver. Re said: "I don't agree that decarbonizing should be farmed out. 1 reckon I should do that myself."
"When do you carry out these maintenance operations?" "On Saturdays."
"Not the decarbonizing?"
"I've told you I have not decarbonized the engine yet."
"When you do you will discover one of two things: either that you have to take a day or two out of a week to do 'it, or you will have to do it over the week-end and get somebody to help you. In either event it is going to cost you something."
" How. if I do it myself?"
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"Look at it this way. I suppose you think your lorry is earning money., for you? It isn't, but you think it is. In that case a day, or more likely two days Oft will lose a couple of days' earnings, won't it?"
"Yes, 1 suppose it will.'
You arc losing quite a sum, say the revenue from one round trip on the Bristol-Manchester route, which you have said brings you in £16. That is a big amount to pay for decarbonizing isn't it?
" Now then, we have got as far in this subject of operating costs as to agree, on fuel at 3d. per mile and lubricants at 0.10d. Tyres are, reckoned at lid, per mile and maintenance is 1.30d. to 2.00d., according to the amount of work the operator does for himself.
You do see," I said, "that in making no provision for maintenance you have been missing an important item of expense which, on every trip to Manchester and back, amounts to somewhere between £1 14s. 8d. and £2 13s. 6d., according to whether some of the work is done by yourself or nit. Up to now we have accounted for £4, lubricants at 0.10d. per mile or 2s. bd. per trip and tyres at lid. making £2 6s. 8d., and the total, taking the higher figure for maintenance, is £8 2s. 8d.
No Connection
"We come now to depreciation. You said something about having bought the vehicle on hire purchase and that in your opinion that was a substitute for depreciation. How do you make that 'out?"
"What 1 mean is that I cannot allow for depreciation as w.11 as pay instalments on the hire-purchase agreement." don't see the connection at all."•
"Well, I'm paying £48 per month and shall be doing Si) for another 15 months. It will be time to start thinking about depreciation when that time comes."
"If you go on as you are doing you won't need to pay £48 per month for 15 months or anything like that." "Why? What do you mean?"
" You' won be able to pay anything at all, and the lorry
will be seized by the company which financed the purchase. You are not making enough to enable you to carry on so long."
"Making any allowance for depreciation won't help me. Depreciation, after all, is only a booking account and in cases like mine would involve me in putting aside each week or month -a certain sum of money against the time when my present vehicle will be too old for further economical service. As things are at present, and until I have finished paying for this vehicle, I cannot put that sum on one side."
"But your lorry will be depreciating all the time, and you will eventually want money to buy a new one. Otherwise you will just go out of business."
" Yes, I know that all right, but I can purchase a new one in the way in which I bought this—by hire purchase— and if I must save up for the initial down payment I shall have plenty of time for that when I have finished paying these instalments."
So Nearly Right You are so nearly right in the way you have worked things out in your own mind that you make it extremely
difficult for me to explain to you just how you are wrong, and yet you are hopelessly wrong. What I want you to do is to allow me to reckon what depreciation is, according to my method, leaving any further reference to hirepurchase terms alone for the minute. What did you pay for the vehicle?"
"E1000" " Right. I take off £100 for tyres and the same amount or the residual value. That leaves £800 as the net cost a f the vehicle, and if I assume a life of 120,000 miles, the allowance for depreciation must be 1.60d..per mile. The running costs total 8.45d. per mile, comprising: fuel, 3.00d.; lubricants, 0.10d.; tyres, 1.75d.; maintenance, 2.00d.; and depreciation, 1.60d.
"While we are about it we might as well run out the standing charges. They are: licences, 12s.; levy, 3s. 3d.; wages—."
"Wait a bit. There is nothing to put down for wages. I drive the lorry myself."
"Nonsense. You must still allow for that item in the figures for operating costs; you can take it away again when we have finished our examination of the situation as it really is. Wages, as I was saying, amount to £8 per week, that includes provision for National Insurance payments and holidays with pay. I am goihg to make provision for garage rent, 5s. per week for the shed you use. Insurance of the vehicle for third party only, 8s. 9d.; interest on first cost, 16s. The total is—."
"Here, wait a minute. I don't agree to the 5s. garage rent; 1 don't pay any."
Total Costs " I know. I'll deal with that point later, if you insist, and I'll do the same with the item of interest on first cost which I know you will not accept. What I am asking .,ou to do now is to allow me to set out the figures for cost as they should be. The total,• as I was saying, is £10 5s. per week. The running costs, assuming that the vehicle runs 800 miles per week, amount to £28 3s. 4d. per week and the total operating costs 138 8s. 4d. per week.
"There is still need to provide for establishment costs, and there I will admit that your expenditure is likely to be below average, say £2 per week, so that your total expenditure is £40 8s. 4d. That is equivalent to Is. 1d. per mile. Earlier in this discussion you disputed my estimate of Is. per mile: now at least you know how I get my figure.
" Before I go any further I will take your figure for hire purchase as being depreciation. Do you mind if I call it £12 per week? "
"No, although T don't see what you are getting at."
"Good. We are getting somewhere at any rate. The depreciation per mile is :£12 divided by 800 miles, which is 3.60d. per mile. That is a convenient figure as it compares with the 1.60d. per mile which is all I have allowed. If you adopt that figure, I must add 2.00d. per mile to your running costs, making the total is. 34. instead of Is. Id. I have some more calculations to put forward and I propose to use the lower figure."
"Now that is something that we can agree upon. The lower figure, I can see, is going to help me in my argument about the rate I am charging for the Bristol-Manchester job."
"Don't you get any wrong ideas in your head, the calculations I am about to make will blow your ideas of profit sky high.
"You have told me that you earn, on an average, £16 per trip and you run that trip twice per week. In that case, your gross earnings on the Bristol-Manchester run total £32 per week, You have also told me that your average weekly mileage is 800. The balance of miles after deducting the 640 miles for the trip is 160. What do you earn on that? "
"Enough to bring the weekly total up to £40 per week."
"But I have shown you that your costs are £40 8s. 4d. per week. You are working at a loss of 8s. 4d. per week."
" Yes, that is how it seems to me, but I can take nearly £8 of that cost as being my wage as driver, andat that I am satisfied."
"I am sorry to hear that, for it means that you will never be able to put another vehicle on the road."
"Why not?"
"Because you will have to pay the driver His full wage, which will bring my figures back again to your notice. You will be losing 8s. 4d. per week on that second vehicle. However, we will let it go at that. I would like to hear that you are going to keep records of costs from now on; also that you will be sure to make provision for depreciation apart from hire-purchase charges, even if you do regard it as a booking matter and not cash.
"What I recommend you to do is to keep accurate . accounts of your operating costs, including something for every single item in the Tables, and to set down, at least as often as once a month, the amount you are actually paying for hire purchase. You will then at least know how you stand and will not be going on, as you have been up to now, imagining that you are in easy street.
"You must realize that a man like yourself, in the . haulage contracting business, canvassing for work with a shabby lorry, is handicapped in his search for work in just the same way as is a commercial traveller when his clothes are shabby and his shoes down at heel." S.T.R. c31