The Old Problem of Hi
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Irchase Payments
A/5 old problem has croppecla up again, as is the habit 0f old problems. The fact that it is disguised in new raiment does not, in reality, alter it, but does mislead many who have never quite accepted what I have on several occasions put forward as its solution.
It is a, problem which I ha'-e, from time to time, dealt with in these articles, and now it has arisen in connection with rates assessment, It has been suggested that some. thing should be . done to ease the difficulties of those operators who have acquired their vehicles by means of hire-purchase contracts.
At one time the idea was widespread that payments on account of hire-purchase should be included as an item in the schedule Of operating costs of vehicles. Moreover, those who had that view also believed that rates should be assessed on a basis which would permit of hire-purchase instalments being treated as a logical item of operating costs. In other words, that rates should be high ennugh to allow the operator to pay those instalments and still have available •just as much profit as if those instalment payments were, as a matter of fact, part of the running expenses of his business.
Hire-purchase Instalments Must • Be Paid Out of' Net Profits
The idea is, of course, quite wrong. It is absurd to debit hire-purchase instalments against the vehicle in this way. They must be paid by the haulier out of his net profits; there is no other way of dealing with them. If an operator he spending ESO per week on account of operating costs, plus overhead and establishment costs, and draws a revenue of £60, his net profit is £10 per week. If, out of that £10 he has to pay £5 per week instalments on hire-purchase for his vehicle, that does not actually affect his profits, although, quite naturally, it does affect the amount he is able to pocket, during the period of the instalments, as the proceeds of his underking.
Hire-purchase payments must inevitably, it seeins to me, be entered as part of the capital account—must. be set dbwn in' the balance sheet, but not in the profit an loss or trading account.
The absurdity of the idea of treating these instalments as operating costs is more effectively demonstrated if we regard it as something to be taken into account in connection with rates assessment, working on the assumption that revenue 'which is composed of the rates charged is to 'be assessed on a cost-plus-profit basis, It wa do accept,' as a 'principle, that hire-purchase inetalments are to be so debited, then the operator who has acquired his vehicle in that way must charge rates higher than those of an operator who has paid cash for his vehicle.
If that be the case then, in compiling a schedule of rates, we must have two sets of figures differing from one another by the amount involved in the hire-purchase instalments.
That is, of course, quite absurd and unacceptable. .
Take, again, the example quoted abeve of the operator whose total expenditure is £51, per week and his revenue £60. Suppose that he be carrying 5-ton loads of traffic in both directions over a 100-mile route, doing five journeys per week. He carries those SO tons for the £60 and his rate Must be 24s. per ton.
The operator Who is paying £5 per week hire-purchase instalments will, according to the above idea, insist that his operating costs are £55 per week, so that his revenue, on the mine 20 per cent. net-profit basis, must be £66 per week and his rate per ton approximately El 6s. 6d. per ton. If that figure can be obtained for the traffic, well and good, let both operators take it Do not, however, let us pretend that becalm hire-purchase instalments have to be paid there, is justification for raising the basic level of instalments ,from £1 4s, to £1 6s. 60, per ton.
The Government Haulage Scheme and Hire-purchase Contracts
The fear was expressed, during discussion of the rates fixed in connection with the Government haulage scheme, that the general adoption of the scale wourd ruin all those whose vehicles were held on hire-purchase contracts,, That was one of the things I could not understand and one to which I. therefore, did not refer in the articles I wrote about that scheme.
It is, perhaps, true that the percentage margin of profit available in those rates 'is meagre, e.specially if compared with that which operators can earn carrying loads for commercial houses in the ordinary way of business. It may well be that, in some cases, where an operator's payments in respect of hire-purchase instalments are heavy, he will be hard put to during the "period over Which be is paying those instalments. • 'That fact, however, cannot possibly be adduced as a reason for increasing the rates, because, to increase them sufficiently to pay the hire-purchase instalments of some operators would involve the payment of excessive profits Moreover, the rates do, in many mks, show profits equal to those which many operators can earn in the ordinary course of events. In this connection itAtnust be borne in mind that the rates are regular payments, week by week, throughout the period of the Contract which is, as I understand it, for a minimum period of three months, and as the scheme develops and settles down, for longer than that.
It is always accepted that rates for period contracts may reasonably be less than those which would apply in ordinary day-by-day operations. In the latter, the Amount of work, and the earnings therefrom, are generally such as to show a greater percentage profit per job than that which is avail able in these Government rates. Nevertheless, there is the fact that in all ordinary haulage operations there are inevitable periods_ of stagnation, periods when no work is available, and, moreover, many loads, carried at " returnlogel rates," which do not show any profit at all. if all these circumstances be taken into consideration, it will probably be found that there is not a great deal of difference in the profits earned over a given period.
The Burdens of Income Tax and Hire-purchase Payments Concerning the problem of disposing of these hire-pur chase instalments, during a peridd when profits are , stabilized at this apparently low level, there are ways and means so that the incidence of the payments may be evened out and the operator enabled to carry on without any difficulty.
When this subject was mooted it arose in connection with
a question of income-tax spayments. The suggestion was made that hauliers Would, in many cases, find themselves in difficulties owing to the fact that during the coming year, when their profit under this scheme would be less than hitherto, they would be involved in heavy payments for income tax over the two years just past. The suggestion was further made that this burden, in addition to having to pay hire-purchase instalments, would be too much for, many small concerns to bear. I could not appreciate this difficulty and asked for an explanation. It was given to me on these lines.
Take the case of a small limited company, .having three
working directors. During the years 1940 and 1941 the concern made an average profit of 23,000. If it diverted its energies from ordinary commercial business and put its vehicles into the " hard core " fleet to be operated at Government rates, it is anticipated that the profits will be reduced to, say, £1,600 per annum
The figures for four years were, according to this haulier, as set out in Table 1. It will be noted that the company has two vehicles, bought April 1, 1939, for 43,000 and that the payment for these two is to be spread over two years. This pa.ymept of £1,500 per annum, on account of hire-purchase, is set dawn in the profit and loss account as a deduction from profits. In consetuence, there is shown, for 1940, a deficiency of 2603, and, in 1941 a furthar deficiency of 2566, making £1,169 M be carried forward
For three months of .1942 the gross profit is diminished,
because the operator has started to work for the Government under this scheme. At the same time, he has now finis'ied paying for his vehicles, so that he actually daes in that year show a net profit of 2528. That, however, still leaves a deficiency of 2641 to be carried forward to the year ending April, 1943. For the whole of that year he is working for the 'Government and earns a gross profit of only £1,600.
The net profit, after deduction of the salaries of the three directors and the wear and tear of vehicles, is only
2382. He has, however, to pay 2644 income tax on account of the 21,288 trading profit during the year ending April, 1942. There is, therefore, in this final year a further deficiency of 2312 and, accordine° to.. these figures, the total deficiency over the four years is £953.
At the foot of Table I are shown the details of the assessment of the wear and tear allowance, which is given in the body of this table.
Now, I maintain that the £1,500 per annum for the year ended April,' i940, and April, 1941, should not appear in this statement of profit and loss. It is something which should be entered in a capital account and, actually, I am pf opinion that a true sta.tentent of profit and loss is that set out in Table II. This shows a total profit over the.four years of 22,047, as opposed to the alleged deficiency of
2953. • • Two Vehicles in Possession a Valuable Asset . 1 can appreciate that the company, during that period of four years, has had to spend £3,000 on these vehicles, so that, to all intents and purposes, it is .2953 out of pocket. What has been overlooked, however, is that it has still, at the end of this fourth year of operation, the valuable asset of two vehicles, which should stand' in die balance sheet at 21,228.
Actually, in the balance iteet, there would be, at the comunencement at the first of these four years, an asset of two vehicles valued at 23,000 and a liability on account of hire;edurchase of the game amount. At the end of the second year the value of the two vehicles. has been reduced to 22,900 and the liability on account of hire-purchase instalments has been reduced to 21,500. At the end of the third year the book value of the two vehicles is 21,920 and the liability on account of hire-purchase is nil. That, to my mind, is the way in which the problem of hirepurchase payments add its relation to accounts should be solved.
ThAt must be the way out. Otherwise we should be expecting a company which has no capital, to, be able to make a gross profit in normal times of £3,000 per annum and under those alleged limited profits available under the Government scheme, of £1,600 per annum. That, surely, is something which can be regarded as fantastic and impracticable. .
It is permissible. I think, to use this problem to point a moral. The difficulty herein described would not arise if the industry would get tbgether and standardize a system of costing for use by its members.. Such a system must inevitably provide for separation of purely vehicle-operating costs from all others. The latter would be classified as the establishment charges; they would, in reality, represent the cost of operating the business. An essential part of such a scheme would be a standard form of balance-sheet, trading account and profit-and-lossaccount. The basic underlying principles of the system would be the same' for all sizes and types of business; the actual returns would differ in detail. Large concerns; owning a considerable number of vehicles and operating, perhaps, in connection with several different kinds of haulage, woUld
require the main items to be sub-divided. Small firms, having a few vehicles, could economize in clerical labour
by grouping two or more items under one heading. • I outlined a suggested standard forth for the haulier's annual 'acconnts in a series of three Articles, which commenced in the issue of The .Conimetcial Motor " dated
September 2p., 1041 '