How to Check Rate-cutting
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/N My article in last week's issue of The Commercial Motor, I showed a one-man one-vehicle operator that his establishment costs were likely to reach £5 14s. id. per week. I concluded the article with the remark that if the small haulier knew just what his expenses were, both operating and establishment, he would not be so inclined to indulge in the practice of rate cutting. As it was, I said, they thought they were making a profit whereas they
were really making a loss. .
"But. surely," said my visitor, "they soon find out what is happening? They can't go on for long in that blissfully ignorant state."
" That's just where you are wrong; and that is the big trouble with you haulage contractors, especially in the case of. the smaller operators. A man can go on for a couple of years before he feels the pinch.
" You see, there are several large items of cost which do not crop up for some time after a new lorry has been bought and put into commission. Take tyres, for example. A good set, reasonably well-cared for, and on work which is mainly confined to good roads, should last at least 20,000 miles. That may be 18 months or even two years' work for some men, so that there is one big item of expense that he is probably thoughtless enough entirely to overlook.
Good Driving Reduces Repairs "Then again, a vehicle which is reasonably driven and which does not have to go off main roads will go for about the same length of time, possibly even longer, without, as the advertisements and testimonials say, ' costing a penny for repairs,' although, mind you, I always take such statements with a grain of salt.
"Well, the longer. a man puts off paying a penny or two for repairs, the bigger his bill is going to be when he does have to put his hand in his pocket. It is then, especially if a big repair bill comes almost immediately after he has had to buy a new set of tyres, that the improvident man—he who has not made the provision for expenditure on those items as recommended in these articles and in " ' The Commercial Motor' Tables of Operating Costs "—finds that he has not been making a profit after all, but only a loss.
"It is then too, that, having no margin for such eventualities, he finds himself in queer street. It is to save you from a 'like experience that I am being so careful to explain to you all about the subject of establishment costs."
"I see, and thank you very much. But, look here—" and he picked up a copy of the Tables which happened to be lying before us. " Well ? " 41. A34 "According to these Tables the total cost of operating a 7-tonner, running 400 miles per week, is given as £30. The recommended weekly earnings are given as £40 4s. There is a difference of £10 4s. per week. If my establishment costs are £5 14s. id. per week, say £5 14s., then my net profit is going to be only £4 6s. per/week, which ts hardly. enough. How much is allowed for establishment costsin that figure of £40 4s.?"
"The amount is £3 10s. But the figures for establishment costs provided for in the Tables have very little meaning." He was clearly astonished at my reply.
Establishment Costs Cannot be Averaged "The truth is," I explained, "that it is absolutely impossible to give even an average figure for establishment costs. It is necessary for every haulier to make some sort of estimate of his own. That is something I have always emphasized. So far as the Tables are concerned, there must be some provision for establishment costs, for two reasons.
"The first is that no estimate of charges can be made without including something for establishment costs. Secondly, it is necessary, as I have just shown you, to remind the haulier that there are such things as establishment costs. You needed reminding, didn't you?"
"I certainly did," he agreed.
(It is a fact that in the beginning this haulier wanted to base his charges on a figure which was only £5 per week greater than the operating cost of his vehicle. That £5 and more as I have just shown, would have been swallowed up, leaving him without a penny that he could claim as profit.)
"Well, although it is, as I have said, impossible to quote even an average figure for establishment costs, yet the £3 10s. which is given in the Tables in reference to a 7-tonner is really not wide of the mark, considered as a possible average."
"Then," observed my. friend, "my establishment costs, as just estimated, are considerably above the average?" "Yes, they are" " Why?"
"Because of the way in which you are intending to carry on your business in that you are starting out with no actual work in hand. You are going to have to advertise for it and travel to find it yourself."
"is it possible to reduce the expenditure?" "Not in view of your proposed methods."
"Are my methods wrong, then?" " No, certainly not" "But they must be if they are going to have the effect of putting my costs up to more than the average."
"They will do that only at first, and the cost per vehicle will decrease when you have plenty of work and have several vehicles engaged."
"Then tell me, what are the ways of going to work whereby establishment charges.may be less, even at the beginning, than the totals you have worked out for me?"
"If you put it that way I can't give you a direct answer to your question, but1 can tell you how others are working, those whose costs are less than the average of £3 10s. per vehicle, which is the amount quoted in the Tables.
"There are men in the industry who start in it only because they have offers of work to do. Take the case of a youngster who has completed his National Service in the R.A.S.C. He is out of a job, or it may be that he is dissatisfied with the work he is doing. Possibly he may be driving for someone else but is discontented.
" He thinks that he would like to start up for himself, just as you are doing. While he is in that frame of mind he hears of someone, perhaps a personal friend, who has some haulage to offer, perhaps a regular service between two large towns.
"The friend doesn't want to run a machine of his own, so the youngster offers to do the work and buys a vehicle from the Disposals Board, together with a Special A licence. He comes to terms on the job and starts out at once with enough work to keep him busy for the greater part of a week.
" While he is thus engaged, he looks out for anything else with which he cart fill in whatever spare time is left to him. He is usually successful and it is not long before he is fully occupied throughout each week. He has practically no establishment costs. A couple of shillings per week for stamps and phones; in many cases 10s. per week will cover the lot. That is below the average 1 have given. Yours, and a good many cases like yours, shows expenditure above the average. it is between these different sums that the average is struck."
"Why then, did you not recommend that way to me?"
Establishing a Sound Business "Because, although it may be a satisfactory way, it is not really a good one, and is certainly not the best. The method I have recommended to you is the only one in which a business can be built up. You are starting out in the way in which you will continue or, at least, that is how you will have to set to work to build up a business which will be more than a one-man one-vehicle concern.
"The other fellow, with practically no establishment charges, will never have an establishment; he will never rise above his present position, because he is not able to enlarge the scope of his operations. He is all the time busy driving his one lorry, and he is not likely to go any farther than accepting occasional jobs which he hears about as he goes his rounds, work which he may or may not be able to take on according to what he has in hand. He is working from hand to mouth all the time.
"Nowyou, with your office established and advertisements, and proper notepaper combined with the quality of service that you render with your first vehicle will soon be in a position to buy another and take on more work.
" After that, in one way or another, you will add to your fleet. The other fellow's business is a sort of cul-de-sac of the haulage industry; it leads him nowhere, and he will be no better off 10 years from now than he is today, if he is in the haulage business at all.
" Your business, on the other hand, is set on the broad highway which leads to the establishment of a sound and profitable undertaking, in the prosecution of which you will be employing many vehicles and men. Your establishment costs seem high now but they are small, indeed, compared
with what they will be then. Nevertheless, they will be considerably less per vehicle and in that way you will be able to compete with others whose costs are at present less per vehicle than yours."
"Looking at it that way, there is good reason for the difference in figures, but there is another thing worrying me. Are the averages for operating costs liable to correction in just the same way? " . . . " Oh no. They. do fluctuate, but not to anything like the same extent."
" Can you tell me to what extent, and how it comes about?"
" In the main, variations are brought about by alterations in the cost of petrol, oil fuel, tyres, insurance, wages, spare parts, mechanics' wages and even National Insurance. The only item which can be said to remain static is the Road Fund tax, and in a way that has been increased by the levy.
"Take the case of your 7-tonner as an example. Since the current issue of the-Tables was prepared the following changes have taken place:—
"Wages have gone up by 1 ls. and National Insurance charges by Is. With provision for holidays-with-pay that means a total increase of 12s. 6d., increasing the amount of that item from 149s. to 161s. 6d. Fuel costs have risen to 4s. per gallon, making the cost per mile 3.34d. instead of 3.14d. Tyres have gone up by 21 per cent, and that item, shown as 1.73d., becomes 2.10d. Maintenance costs have increased by an average of 10 per cent. so that maintenance (d) now becomes 0.63d. and maintenance (e) 1.65d.
" Then there are fluctuations due to kind and method of use. A tipper costs about 121 per cent. more than a sided lorry. By method of use I mean the way the vehicle is driven. A bad driver, for instance, can put the cost of operation up by from 25 to 50 per cent.-, and so on."
"But how am I to be able to keep track of these increases and differences of cost?"
"There is only one sure way: keep track of your own costs, in the way 1 have so often recommended in these columns. The preamble to the Tables gives you that information. Read that thoroughly, study it, and, haring done so, begin to keep your own cost records."
"Well, thank you very much for your help. I shall try to follow your advice May I come to you again if I get into a tangle?"
"Certainly. A letter addressed to S.T.R., c/o The Commercial Motor will always find me."
S.T.R.