From Two Vehicles to Three anc 'rom Three to Four
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T he Problems Which Present Themselves to the Small Haulier as His Business Expands. The Financial and Operational Difficulties Which He Must Face
LAST week I started to deal with the problems of the small haulier who is energetic and enterprising enough to wish to expand his business by obtaining more lorries. This he Would do either by the difficult process of securing additional licences and buying the vehicles or, by acquiring the business of a retiring operator, first of all making sure, of course, that the R.T.C. will permit the transfer of the licence or licences from the retiring haulier.
I am taking the Case of an operator who starts with two vehicles and, by his energy and initiative, is able to run both of them over a regular service, between two principal towns 200 miles apart, three round journeys per week, with a good load ratio-80 tons per week-which is 80 per cent. Taking the good with the bad, that IS very fair indeed for an all-the-year-round average. All the traffic from his home town he obtained himself: nearly all the return traffic was secured from clearing houses, on which, of course, he . had to pay commission. Taking 20 per cent, as a profit ratio, he should be able to earn a net profit, after drawing £150 for himself as manager, of £450 per, annum per vehicle, or £900 in all.
What we want to discover is: Will he be better off in proportion to the number of vehicles if he enlarges his, fleet? What will happen,for example, if he acquires one • 'more vehicle, so that he operates three instead of two? think it will be fairly easy to show that, whilst his total net profit increases, it does not do so by 50 pet cent., as no doubt he expects.
In the first 'place, his establishment costs are going to rise. He will have to work harder and will not be able to take his accounts, etc., home at night to do them in comfort by his own fireside.
Because he has to stay on at the garage, he might just as well get out his accounts, write up his costs records, plan his work, and so on, while he is waiting.
He will, too, have to get about more, visiting his clients and contacting new ones, for; again, it is more than 50 per cent more difficult to keep three vehicles fully loaded than it is to do the same for two.
Increased EstablishmentCosts
In brief, all the following items of establishment cotta will be increased when fie enlarges his fleet, some of them, as, for example, office rent and rates, being new to his accounts. Besides these items, additions will occur in respect of telephones, audit fees, travelling expenSes, director's fees, and advertising, amongst others, The result is that, including a correction for income tax, such as I made in the previous case, his total will be £560 per annum: that is, £3 14s. 8d. per vehicle per week, or' 9s. 4d. per ton of pay-load per week.
Whilst, with his two vehicles, he was able to obtain loads which enabled him to maintain an average of 1,200 miles and 40 tons per week, it is likely 'that, for some time at least, he will be unable to employ the third vehicle so effectively. A weekly mileage of 1,000 and 30 tons of traffic will more probably be the results achieved.
The standing charges for each of the two original vehicles will be as before-09 per week-plus driver's subsistence' and expenses, £2, plus establishment costs, £3 14s. Ed., making a total of £14 14s. 8d. For the third vehicle the total will be a little lower, there will be less overtime and not so much to pay out in subsistence, etc. The figure will be £13 10s. 8d., so that the total of fixed charges for the three vehicles will be £43, to which must be added £85 for running costs at 6d, per mile for 3,400 miles.
Altogether, his expenditure is, therefore, £128 per week, and if he is to make 20 per cent, profit on hit outgoings, his revenue, in round figures, must not be less than £154, leaving a net profit of £26. As he carries, in all, 110 tons, his rate per ton must be at least 28s.
Some of his traffic, however, is obtained from clearing houses, to which he pays 121 per cent. commission, so that the gross average rate must be 30s. per ton. If the commercial rate is actually 325. per ton, as was assumed in the previous article, his weekly profit is increased to £37. That, for the two-vehicle owner, was shown in the previous article to be from £22 165. to £30 Os., so that the percentage increase, for a 50 per cent. increase in the number of vehicles, is from only 14 to 22 per cent. That is definitely an example of what is meant by the law of diminishing returns, inasmuch as the ratio of profit increase is less than the ratio of expenditure.‘ The expansion from two to four vehicles may occur in two stages or in one. The haulier may buy one vehicle at a time, or he may acquire another business, similar to his own, and thus, at one stroke, double his carrying-capacity. The latter is, in fact, the more probable occurrence. Considering the matter from the operational point of view, there is, this difference.. In the former case, of buying one vehicle at a time, he meets and appreciates his growing difficulties gradually: in the latter case the increase is more of a jump, possibly a surprise to him.
He will soon discover, for exaniple, that he will have to engage a clerk to do his office work. He will find that it is quite impossible for him to find loads for four vehicles, supervise their operation and maintenance, keep control of four drivers and, at the same time, attend to all the clerical work involved. Up will go his establishment costs at once by £160 a year, or-thereabouts. His office expenses will now becoine real, instead of, as before, a mere token, and he will -have to spend a good deal more time-on the road, visiting customers, meeting complaints from his old ones, or finding new ones. He, himself, quite justifiably, will want an increase in salary and will draw £5 per week, on that account, instead of the modest £3 to £3 10s. with which he has hitherto been content. Thus, his establishbent costs rise to £1,000 per annum, £250 per vehicle, or. £5 per week per vehicle, which is 12s. 6d, per ton of pay-load per week. .
Total Weekly Mileage of 4,400
Of the four machines. we can take it that two still maintain their average of 1,200 miles and 40 tons per week. The fixed costs for these are now £9 standing charges, £2 driver's expenses and subsistence, and £5 establishment costs-£16 in all. The other two may,' for a long time, average not more than 1,000 miles and 30 tons per week, the fixed charges being £15. The total mileage for the fleet is 4,400 pet week and, at 6d. peimile, that costs £110. The .total weekly Cost, all in, is thus £172 for a total tonnage of 140.
To make a net profit of 20 per cent, on his expenditure£34 8s.-his revenue must be £206 8s., which is equivalent to 29s. 6d. per ton, Add the commission paid to, clearing houses and the actual rate becomes 31s. 6d. The lower of the two commercial rates, 30s. Per ton, is thus of no use to the four-vehicle operator. At that rate his net profit will be reduced to £23 18s., which is barely 14 per cent. on his expenditure. At 32s. per ton, the upper cornmercial rate, his profit is approximately £37 18s.
At 30s. per ton he makes only £1 2s. per .week more than he did, at the same rate, with two vehicles. That is an inerease of less than 5 per cent. for a 100 per cent. increase in vehicle capacity, in expenditure, and in effort. Even at 32s. per ton his net profit is only £7 12s. per week more than when he rah two vehiCles. The percentage increase is '25 per cent. The law of diminishing returns is still, therefore, prevailing.
Clearly, he decides, he has either too many vehiCles or too few. Being, however, more or less committed to a policy of expansion-in any event, it goes against the grain to go back to two .vehicles from four-he decides that he has too few, and looks around for another couple.
This step brings him a new kind of headache. He has had his work cut out to manage four vehicles, with no aid but a clerk, who is not Much uk to him when away from :iis desk. He realizes that he will have to do one of two things, i.e., either engage an experienced assistant and pay him a good salary, 'possibly coupled with an interest in the business so as to ensure his more effective co-Operation, or he must take a partner.
As, however, he can acquire his additional vehicles only, by purchasing another business, it Occurs to him that the wisest course is for him to try to find an Operator, owning a couple of vehicles and engaged in a bnsiness similar to his own. In other words, to merge with a competitor.
Let us .suppose that he is more fortunate than. Most and .finds a man after his own heart, having a .couple of 8-tonners running L200 miles per week and carrying 40 tons each. The deal is a little difficult, for the partner-to-be knows his value and, after a little readjustment of capital, they join, on equal terms.
Establishment costs, of course, go up again. The new partner wants a salary, so that there are now two directors to pay instead of one. More Office accominodation 'is required and office expenses increase, as also do certain other items such as travelling expenses, sundries, telephones and so on. However, there is one good point about the new man, and that is that he gets quite a lot of his return traffic direct, without needing the aid of the clear ing houses. Our original friend, considering that, and realizing that he is paying an average amount of £14 or £15 a week in commission, decides to look into that Matter and profit by the experience of his new partner, One .method recommended is judicious expenditure of small sums on advertising. This adds still further to the establishment costs but, on balance, should result in economy.
• The net resUlt, at least, is to bring the total of establishment costs to £1,680 per annum £280 per vehicle per annum. or £5 125. per vehicle per week and 14s. per ton of payload per week.
Now, however, there are -four of the six vehicles running 1,200 miles and carrying .40 tons per week, and two running 1,000 miles and carrying 30 tons in a week. The
former operate at £16 12s. per week, and the latter at £15 12s. per week, plus 6d. per mile in all cases. The total coSt is £267 12s.
per week. Adding 20 per cent, on that we get £53 10s., so that a round figure for the minimum weekly revenue is £322. For tha4 stim 220 tons are carried and the minimum
net rate must therefore. be 29s. 4d. (to the nearest, penny). As a fair percentage of the traffic is still subjectto clearing-house commission, this rate needs to be increased to 30s. 6d.
The position, with six vehicles, Is clearly a little better than it was with four, when the minimum rate required was 31s. 6d, At 30s. per ton, the minimum commercial rate, his profit does not quite reach my increaSe of 20 per cent., failing short, as it does, by £5 10s., so that it is barely 18 per cent. At 32s. per ton the profit is £70. •
In view of these results it became evident tomy friend that some further extension of his business. was necessary it he were going to achieve the results which he had in mind, One outcome of a discussion of the subject which he had with his partner was that more activity, at the outward terminal of...the route traversed, seemed desirable in order to increase the percentage of back loads. That seemed to indicate the advisability of establishing a second office. The partner was agreeable to taking charge of that office, but, on going into the question of ways and means, it immediately became apparent that the additional expense involved would be too heavy for a fleet of not more than six vehicles.
It was, therefore, decided to make preliminary arrangements for a new depot and, at the same time, to take steps to acquire some additional vehicles. In good time, an opportunity arose for the purchase of a small fleet of four vehicles of the appropriate size, with A licences covering operation over the route over which they were at present running, and one or two others of approximately the, same length and similar density of traffic. It seemed likely, that the acquisition of this fleet would improve the conditions, and might effect that increase in the ratio of profits to expenditure which was the object in view. .
What happened after this expansion had occurred, and the concern became the owner of 10 vehicles instead of six, will be discussed in the next article. S.T.R.