HOW TO DECIDE WHAT LRE ESTABLISHMENT COSTS
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An Important Contribution to the Series of Articles By Our Costs Expert Detailing the Calculations Involved in Preparing a Quotation for theHandling
of New Traffic
IN the previous article I promised to deal, in this contribution, with the important and little-understood subject of establishment costs. In my experience, most small hauliers have not the least idea of the amount which they spend on such items as are included in the accompanying schedules. It is, indeed, no uncommon thing for a haulier to observe that he has no establishment costs to meet.
I frequently receive letters in which that view is expressed, and often meet hauliers who hold it. On more than one occasion I have been able to amuse them to a realization of the fact that they are wrong, by means of the following expedient. I listen patiently to what they have to say about their costs; including some reference to the absence of establishment costs, and then, in some way or other. I draw attenticin to the telephone. sometimes I am helped by the fact that the telephone bell rings while I am in conversation with the haulier.
• A Trap That Often Succeeds •
On other occasions, I have made some excuse to use the telephone. I then remark: " Your telephone bill must be pretty considerable, I am sure." To that I get some sort of reply, either that it is considerable or that it is not, when I can come back with the further question-. "By the way—who pays for the telephone? "
In that way, I obtain a fairly easy entrance into a real discussion of establishment costs, for, obviously, the expense of the telephone is no part of vehicle operating costs. Equally obvious is it that no haulage business worthy of the name can be run without a telephone. From that starting point I can manage to run through the whole gamut of such expenses, as indicated by the schedule.
There are, in my opinion, two fundamentals which must be observed in costing for a road-transport business. The first is that every halfpenny spent must be recorded somewhere. The second is that vehicle operating costs must be kept separate from all others. It is hardly less important to keep the vehicle operating costs in such
a form that it is possible to check up on the costs of each machine.
I have always insisted, furthermore, that vehicle operating costs are comprised of 10 items, as set down in The Commercial Motor Tablas of Operating Costs. They are:—Licence, wages, garage rent, insurance, interest, fuel, oil, tyres, depreciation and . . . . main
n2 tenance. The significance of the gap before that last item is this: When all items of expenditure, positively relating to the operating costs of a vehicle, are allocated so far as they will go, under the other nine items, then what is left goes under the heading "maintenance."
So it is with establishment costs. When the expenditure on operating the vehicles has been set down, under the main headings enumerated above, then all other costs are of the nature of establishment costs and must be treated accordingly.
Now, it should be clearly understood that it is impossible to lay down hard and fast rules for the estimation of establishment costs. They vary enormously, from a comparatively small amount to a very large one. In some cases the amount may be as little as 30s. per week, and I say, quite bluntly, that it can never be less than that. In the other extreme, I have known it to be as much as 210 per week per vehicle. Much depends, of course, on the class of work. An operator in a small way, engaged exclusively on the cartage of sand and ballast or some similar class of traffic, and operating with his home depot in a rural area, is, perhaps, likely to be most fortunate in respect of his expenditure on establishment costs. Another, located, say, in London, and chiefly concerned with the carriage of parcels, may come near the top of the scale.
Similar classes of traffic, in localities which are also alike, usually carry the same burden of establishment costs. In drawing up the accompanying schedules, I have in mind, first, the class of traffic which I am considering in this series of articles, namely, that of the carriage of sanitary pipes and ware and, secondly, that the locality of the home depot is a Grade I area.
The three lists of establishment costs, shown on the facing page, are compiled from information given to me by various friends in the industry. None of them is an exact reproduction of the costs of any one operator.
The figures and the items, which are more important than the figures, do not need much explanation. As regards the first and second, however, the following note is needed. Where a part of the garage or premises in which the vehicles are housed is set apart for use as offices a fair proportion of the total rent should be debited to establishment costs. The balance, of course, appears under the vehicle operating costs as rent and rates of garage.
• What To Do With Rent and Rates • It may be convenient to debit the whole of the rent and rates of the premises as establishment costs, omitting the item "garage rent and rates" from the schedule of vehicle operating costs. Indeed, that is often done. There is no great objection to that procedure. It is, however, important that the operator who follows that course should, whenever he is comparing his vehicle operating costs with those of others doing similar work, bear in mind the fact that his accounts are so arranged.
If the other operator debits his vehicle costs with garage rent there will be an apparent discrepancy which, in the absence of recollection of the special arrangement just described, will be difficult to explain.
It is to avoid such a risk of misunderstanding that I so strongly recommend standardization of the method of keeping accounts of haulage undertakings, so far as differences in kind of businesses and size of fleet permit such a course to be followed.
Again, where the haulier conducts his office work from his private dwelling-house it is only fair and right that he should debit his business accounts with a sum representing the loss of house room and domestic amenities, brought about by the fact that part of his home is used as an office.
Concerning expenditure on lighting, heating, water, etc., it is usual to debit the whole of these expenses as " establishment," although, if a particularly meticulous apportionment were to be made, part of this expenditure should be included in "garage rent and rates." In the case of these items also, of course, the man who uses his home as his office should debit some of his electric lighting and coal bills against his business.
• Chances That Are Provided by Sundries • I am always afraid of an item entitled "sundries." It offers cover for all sorts of looseness in the recording of expenditure, and I rather suspect that the operators who have given me the figures for the third column have been a little extravagant in their expenditure under this heading. However, in this matter I am merely recording actuality and there are few businesses in which it is possible altogether to avoid such an entry.
The alternative, of course, is to add considerably to the length of the list of items of account. The real difficulty is to know where to draw the line, what to enter under separate headings and what to lump under " sundries " or its half-brother "miscellaneous" Having arrived at the total of establishment charges the next thing to do is to allocate them amongst the vehicles of the fleet, so that each bears its appropriate share. If all the vehicles be alike this difficulty does not arise; the method is simply to divide the total by the number of vehicles.
If I assume that to be the case in all these examples then I find that the establishment costs per vehicle are as follow:—For the three-vehicle man, £159 6s. 4d.; for the eight-vehicle man, £140 6s. 4d.; for the fifteen-vehicle man, E200 5s. 8d. That would seem to indicate that the man with the big fleet is extravagant. Actually there is another reason, and that I propose to divulge in the next article. S.T.R.