Australian Convenience Store News Getting Your 2 cents worth

By Geoff Coy, Certified Practising Accountant

In this article, accountant Geoff Coy looks at the real cost of selling fuel, how to determine the real return on this investment and whether making 2 cents per litre is really worth the effort.

Over recent months we have looked at the smaller margins being made from fuel and the effect on the overall profits of the business.
Now it's time to look at other direct expenses that are not often contemplated but that do have an impact on your site's fuel margin.

For the purpose of this article I will ignore bad debts, bank charges, drive-offs and discounts because these items are more dependent on the level of control the individual operator has over his business.

In an average month Con's site sells 320,000 litres of fuel and manages to squeeze out a margin of 2 cents per litre, net of fuel losses.

Impact of Financial Expenses
Now let's have a look at the impact that financial expenses such as credit card charges, government taxes, overdraft interest and fuel royalties can have on fuel margins.

The impact of credit cards on your margin can't be ignored. Credit cards have been an ever-present part of our life since the-mid 1970's and with the advent of EFTPOS continue to make up an increasing percentage of fuel and shop sales.

In Con's case 50% of all sales are made on EFTPOS or credit card and fuel sales comprise 65% of total sales.

In an average month credit card and EFTPOS charges cost Con $3,200 of which $2,080 can be attributed to fuel sales.

The Federal government tax on bank deposits was abolished in July. However the state debits tax in NSW is indirectly charged on the purchase of fuel in that the purchase of fuel is invariably paid from the bank account.

In an average month, State government debit taxes cost Con $180 of which $117 can be attributed to fuel purchases.

The current trend is for site owners to have an overdraft facility to provide working capital for fuel stock.

Over the last 6 months Con has estimated his average stock holding of fuel to be $60,000 per day.

Con currently has an overdraft well in excess of $60,000 that is also used for other working capital requirements.

Con's current interest rate is 7.5% and based on present rates the portion of his monthly interest bill attributable to his fuel stock is about $375.

Con's site is a franchise operation and pays a royalty to the oil company in return for running the site operations. That part of the royalty fee attributable to fuel sales amounts to 15% of gross profit before fuel losses.

Based on average monthly fuel sales of 320,000 litres @ 2.5 c.p.l. (before losses) the fuel royalty calculates to $1,200.

Now let's have a look at Con's fuel margin after having deducted the above expenses from Con's fuel margin of 2.5 cents per litre

What started out as a margin of 2.5 cents per litre before fuel losses and financial expenses is now a more modest 0.81 cents per litre and this is not the end of the story.

There are still bad debts, drive-offs and customers' discounts to take into account depending on location and operation of business, not to mention staff costs, computer and console expenses, electricity and other operating expenses.

Now let's take a look at the return Con is achieving from his investment in fuel.

The fuel profit after losses and financial expenses for an average month has been determined at $2,595 and Con has calculated his average investment in fuel over 12 months to be $60,000.

This represents a return of $4.325% per annum on the assets employed i.e. underground fuel.

In comparison to current bank interest rates on savings accounts a 4.325% return seems hardly attractive when bearing in mind the risks associated with being in business.

When considering all other known operating expenses it is doubtful whether Con would make any money from fuel at all.

The $60,000 that Con has invested in fuel could be better served by sitting in a cash management account and earning around 4%.

When next you contemplate your fuel pricing strategy or prepare you next business plan be mindful of all the costs associated with the sale of fuel and the return on the amount of money you have invested under the ground.

Don't lose sight of these costs just because they might be grouped together under the heading of general business overheads.

If you are working on anything less than 3.5 cents per litre then chances are you are losing money on fuel.