Costs versus expenses

In any discussion of “costs” we must make the distinction between cost and expenditure (payments and orders). Not recognising the difference is a major reason for the failure of new transport businesses, explains NICK PORÉE

A new or quality used vehicle may run for some time requiring only payments for fuel and some servicing. It may seem to make a handsome profit. There are, however, costs of wear and usage that will only turn into payments later when tyres need to be replaced, the clutch needs to be overhauled, and other work is required. A set of tyres for a five-axle combination, for example, costs R120,000; a clutch overhaul can set you back as much as R150,000.

To allow for these “hidden” costs, we must use a standard costing system when quoting or budgeting for transport operations. The standard cost must be a combination of variable costs (rands per kilometre) and fixed cost per hour (rands per hour).

The standard costs can be calculated or derived from industry figures, but must cover the full long-term operating costs of the vehicle type used. The apparent initial “excess profit” must be banked or invested in a separate contingency account and not used until the operating expenses inevitably increase to equal the standard cost.

To control this process:

• Keep detailed records of expenses (including goods ordered not paid) in a set of management accounts. These accounts record variable expenses by vehicle and fixed costs by category.

• In order to relate these costs to work done and
payments received, keep records and produce monthly statements which relate the costs and expenses to the work performed.

• Detail each vehicle’s kilometres and hours worked – for each operation, every day – including load, trip, and customer.

• An analysis of vehicle operations gives us load weights, capacity utilisation, and time utilisation for loading, travel, and unloading, as well as standing times.

• An analysis of the management accounts gives us
vehicle costs per kilometre and the fixed costs per hour worked.

• We can then produce a performance analysis that shows the costs per vehicle and costs of each operation, as well as the variance as profit or loss.

• This monthly process is essential for the management of a road freight operation, as it is not possible to control operations using annual financial statements.

Depending on the size of the business, these processes can be done manually, in a simple computer program, or by one of the many electronic fleet management programs available. The important issue is to ensure that the monthly information is condensed and presented in a format that allows a busy operations manager to make decisions to manage the activities.

There is a danger of “information overload” if too much data is produced by the system. This must be countered by an analysis of core performance relationships against budgeted performance parameters – for instance, load percentage, kilometres per load, percentage standing time, and loads per day. The daily report should not just be reams of figures. It should be concise and focused by operation, shift, and vehicle category, as well as highlight areas of sub-standard performance.

These processes are described in more detail in Management of Road Freight Transport Transport from Bayway Books – bayway@npagroup.co.za.