Why PSV operators prefer old 14-seat vehicles
The Sunday Nation
Nairobi,
02 November 2014
A school that I am associated with (through scholarship, not ownership!) is planning to buy a bus. When the idea was first floated, everyone assumed that it would be sensible to go for a large 67-seat vehicle; after all, isn’t that what all schools buy?
After shopping around the management discovered that a large bus would cost between Sh12 million and Sh15M. Then I suggested to them that they can probably get a better deal if they went for two smaller buses – 50-seaters. Interestingly, the cost of two buses came to about Sh13M.
Even though the cost of running two buses is slightly higher than that of operating one, the school has realised that it can carry more students at one go (100) with the two smaller buses than with one large one (67). Yet the purchase price is approximately the same.
This case reminded me of the difference between profit and profitability. Even though most businesspeople can calculate their profits, they are completely at a loss about profitability. Many assume that the two are the same thing, but they are not.
Profit is the amount of money that your business makes in a given amount of time – daily, weekly, monthly, yearly, etc. Profitability is the amount it makes in relation to its net worth.
From a financial management point of view, profit is the oxygen that keeps a business alive (preventing it from dying) while profitability is the fuel or the fertiliser that helps it grow.
Consider two hypothetical businesses: one makes a profit of Sh50,000 per year while the brings in Sh25,000 annually. Which one is doing better? Many people will be quick to say the first one. But what if we are told that it is worth Sh250,000 while the second one is worth Sh50,000? Now the situation changes dramatically!
The profitability of the first one is 20% per year while that of the second one is 50%. If all things remained constant, the first business will double in size in five years while the second one will take only two.
In five years time, there is a good chance that the second business will be making more profit than the first one. This is the power of profitability and I think it is one of the main reasons why many Public Transport Vehicle (PSV) operators prefer old 14-seater vans to new 33-seat mini-buses.
The PSV business in
If you can get an old 14-seater for about Sh1.5 million, it can theoretically “buy itself back” in 18 months. A new 33-seater bus will cost about Sh5 million. It’s earning per seat will not be much different – Sh73,000 per year. Therefore it will need two full years to “buy itself”.
Wouldn’t you also go the smaller one?
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