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Planning for Profit
Page 104
Page 109
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Setting Up a Sinking Fund
In Addition to Knowing the Cost of Operating a Vehicle, Distinction Between Future and Current Expenditure Must be Observed
LAST week in replying to a reader's inquiry for advice on how to set up in haulage, the importance of first making a survey in the area in which it was proposed to operate as to the likely availability of profitable traffic was emphasized. This, in turn, presupposes that the would-he operator has already acquainted himself with the likely cost of operating the vehicle he has in mind.
In addition to obtaining a knowledge of the 10 items which go to make up the total operating cost, and the relevant figures for his particular vehicle, some acquaintance with the general principles of commercial vehicle costing would also be advisable, so that the correct interpretation can be made on whatever estimates are calculated.
Whilst the meaning of the 10 items of operating cost, namely licences, wages, rent and rates, insurance, interest, fuel. lubricants, tyres, maintenance and depreciation, may be fully appreciated, the division of these costs can be confusing to a newcomer.
Because there are two fundamental factors in commercial vehicle operation—the time element and the mileage run—there is an appropriate division when assessing the cost of operating a vehicle. Expenditure directly dependent upon the time factor can be termed "Standing Costs" and consists of the first five of the items already enumerated. Because they are determined by the time element it is convenient to show these costs as a weekly expenditure or, alternatively, per hour or per annum.
THE remaining five items of costs just listed constitute "Running Costs" and are invariably shown in pence per mile, and, in " The Commercial Motor" Tables of Operating Costs and in this series of articles, are calculated to two places of decimals.
In addition to its direct application to the actual operation of a vehicle, the time element has a bearing on other aspects of commercial vehicle costing. In this particular instance the reader required to know the likely operating cost of the vehicle he had in mind, not for the value as such but to provide some basis on which to formulate charges to submit to potential customers.
Even if the whole exercise proves successful it must inevitably relate to work which will be done in the future. Oa the other hand, from whatever source the reader obtained the basic costs on which to formulate charges, these costs would relate to results obtained from the operation of vehicles in the past. no matter how recent.
In addition to requiring such costs so as to provide a sound basis for charging, established operators will also use past records as a standard by which to judge the current rate of expenditure solely as a measure of efficiency, and independent of any charges they may submit to customers.
TIM 10 items of operating cost, as well as being divided between standing and running costs, can also be segregated whilst the vehicle is actually being operated, between immediate and deferred expenditure. This division was referred to in this series recently when discussing the prudent hire-purchase of commercial vehicles.
Apart from this aspect, however, even if a new vehicle has been purchased outright, it is still important that the operator should fully appreciate the proportion of his total expenditure which has to be met currently with operation and the balance which will be steadily accumulating as the mileage increases.
As an example of the relative amounts of these two divisions. a30 the cost of operating a 3-ton oiler 400 miles a week is now detailed. • The unladen weight of a standard platform vehicle of this capacity Would be around 2 tons 8 cwt. with a resulting annual licence duty of £36. Allowing a slight addition for the annual proportion of the carrier's licence fee, the equivalent cost per week for this item will be 15s. 3d. The total cost of wages to the employer will be assessed at £9 14s. 10d. This amount is based on the minimum remuneration payable to a driver operating in a Grade I area as defined by the Road Haulage Wages Regulations R.H. (70). To this is added the employer's contributions to the new Graduated Pension and National Insurance Scheme and to voluntary employer's indemnity insurance. An adjustment is also made to allow for the cost to the employer of two weeks' holiday with pay for the driver.
IT will be assumed that this vehicle is housed in a garage overnight and that the equivalent cost of rent and rates is 10s. 9d. a week. Comprehensive insurance cover for this type of vehicle when operated in a medium-risk area would incur an annual premium of £73 a year, or £1 15s, Id. a week. Interest charged at a nominal rate of 5 per cent. on the initial outlay of £1,045 would be the equivalent of II Os. Ild, a week.
The total for these five items of standing cost thus amounts to £13 16s. 10d.. and on the basis of the weekly average mileage of 400, as already agreed, the standing cost per mile is 8.30d.
The major item of running costs, namely fuel, is reckoned to cost 2.21d. a mile. This is calculated on a cost per gallon of 4s. lid. and an average rate of consumption for this oil-engined vehicle of 22.5 m.p.g. The cost of lubricants is assessed at 0.23d. and tyres at 0.74d. a mile. This 'latter figure is based on a cost per set of £93 and an estimated mileage life of 30.000. Maintenance, inclusive of washing and servicing as well as subsequent major repairs, is calculated to cost the equivalent of 1.68d. a mile, provided the average weekly mileage is not less than 400. The final item of running cost, namely depreciation, adds 1.36d. a mile. This amount is derived by first deducting the equivalent cost of the original set of tyres from the total cost of the vehicle, followed by a further deduction relative to the ultimate residual value, which in this instance is assumed to be 10 per cent. of the initial cost. This leaves a balance of £848 and, assuming a vehicle mileage life of 150,000, the depreciation cost per mile is then obtained.
The total for these five items of running costs is 6.22d. which, when added to the standing cost per mile of 8.30d., gives a total operating cost of 14.52d. at 400 miles a week.
'The corresponding running costs per week would be fuel £3 13s. 8d., lubricants 7s. 8d.. tyres £1 4s. 8d., maintenance £2 16s., depreciation £2 5s. 4d.; total. £10 7s. 44. When this latter amount is added to the weekly standing cost of £13 16s. 10d.. the total cost of operating this 3-ton oiler 400 miles per week becomes £24 4s. 2d.
The division will now be made as between the immediate and deferred expenditure. Dealing first with standing costs, it will be assumed that licences are, in fact, purchased annually, although admittedly shorter periods of licensing are possible at higher rates pro rata. The estimated weekly cost of 15s. 3d. for licences will therefore be considered a deferred expenditure once a new vehicle has been put on the road fully licensed until the time comes for renewal.
The amount estimated as the total cost of wages to the employer, namely £9 14s. 10d., will naturally have to be met week by week. and it will also be assumed that rent and rates (10s. 9d.) fall in the same category.
The annual premium in respect of vehicle insurance has been reckoned at 173 and it is probable that this item will, in fact, be met annually, so that the equivalent weekly cost of ft 15s. Id. can be considered deferred expenditure. Interest charges (LI Os. 11d.) will also be similarly dealt with, so giving a total of £3 I Is. 3d. for the three items of standing cost which can be considered deferred expenditure. The balance, namely E110 5s. 7d., will have to be met week by week.
Dealing similarly with running costs, the whole of the fuel cost-f 3 13s. 8d. a week-will be a current expenditure, even though the fuel may be purchased in bulk, whilst lubricants (7s. 8d.) would fall in the same category.
Still assuming that the operator commences with a new vehicle, it would normally be some time before any expenditure should be incurred on tyre replacement. As a result, the whole of the estimated weekly cost of this item, namely 11 4s. 8d., would be reckoned as deferred expenditure, whilst the cost of depreciation (£2 5s. 4d.) must "obviously come under this heading.
As already mentioned, the item of maintenance includes washing and servicing, in addition to subsequent major repairs. It is common practice to perform some of these minor servicing tasks on a weekly basis and on this account 15s. of the total cost of £2 16s. will be reckoned as immediate expenditure. whilst the balance (f2 ls.) will come under the heading of deferred costs. The division of the five items of running costs is, therefore, £4 16s. 4d. immediate expenditure, and £5 I Is. deferred expenditure. Added to the corresponding division of standing costs, this gives a total immediate operating cost of £15 Is. 11d. and deferred expenditure of E9 2s. 3d.
It will be noticed that, of the total immediate operating cost, £10 5s. 7d. constitutes standing costs whilst the balance of £4 16s. 4d. is attributed to running costs. As, however, £5 Its. is the proportion of running costs determined as deferred expenditure, it follows that if the relatively small mileage of 400 a week were increased, the proportion of deferred expenditure would become greater.
But even at the modest mileage of 400 a week, ultimate expenditure at the rate of £9 2s. 3d. a week is being accumulated. It is, therefore, essential that the operator should know not only the extent to which he is becoming indebted, but also make provision so that appropriate funds arc available when the need arises. This can best be done by the setting up of a sinking fund, and the form shown below is convenient for this purpose.
As recommended for other forms used in connection with transport recording, the chief distinguishing feature between one form and another should be entered at the right top corner. where it is most readily obtainable. As one form will be used for each vehicle, this information will consist of the vehicle number and the period--possibly three or six months-to which the form refers. In the left top corner on all the forms can be entered the reference number of the form itself, so as to facilitate internal reference and, additionally, when stationery is being reordered.
In the centre portion of the heading there should be entered the total standing cost per week and running cost per mile. which have been allocated as deferred expenditure. In the case of the 3-tonner this would read: Standing Costs £3 Ils. 3d. and Running Cost 3.33d. per mile (at 400 miles per week).
The main section of the form is equally divided under the two headings of "Estimated Income" and "Actual Expenditure." Assuming that other records are maintained weekly, the first column of this form will be headed "DateWeek Ending," whilst in the next column the mileage run during the week is recorded. In the third column is entered the total standing cost, as recorded in the heading, which will remain constant. The amount shown in the next column, however, will vary according to the mileage run and will be arrived at by multiplying the amount shown in the heading as deferred running cost by the appropriate mileage for the week. The amounts recorded in columns 3 and 4 are added and entered in column 5, whilst the accumulative total throughout the period covered by the form is shown in column 6. This completes the columns under the heading of "Income."
Similarly, the section devoted to expenditure commences with another column in which the date of the relative week ending is entered. At first sight this may appear to be duplication of the corresponding column in the income section, but it will be appreciated that actual expenditure will not in all probability be incurred at a regular interval precisely because it is deferred. There then follows a larger column in which is recorded a description of whatever repair or replacement has been undertaken. The total cost of this work, both as regards labour and materials, is entered in the next column with a cumulative total alongside.
The deduction of the amount shown in this last column (10) from the total income to date given in column 6 gives the balance to date, which is entered in the last column (11). The successive amounts shown in this last column week by week provide the operator with a guide as to the balance available to meet expenditure which he will know, from personal experience of the vehicle, is imminent. In addition to information relative to the mechanical condition of the vehicle, the setting up of a sinking fund as indicated here ensures that adequate provision is being made for meeting licence-duty fees and insurance premiums when they become due, and ultimately the major expenditure of vehicle replacement.
The use of this Sinking Fund form would, of course, not replace the keeping of the Vehicle Cost Sheet which in previous articles it has been recommended should be the basis of a cost recording system. ' S.B.