Next to salaries, wages and benefits, rising vehicle costs are a growing concern for businesses. Initial purchase prices combined with climbing fuel costs and regular maintenance costs are forcing business owners to take a second look at their vehicle policies.
Any time a company provides an employee with a vehicle, both the employer and vehicle operator must realize that the vehicle is a both for earning income, but it also directly represents changes to the cash flow and profits too. Achieving a sense of responsibility can be accomplished by the management, by including the employee in the vehicle or fleet selection process. It also helps to share the facts concerning operations and vehicle expenses with the employee. But before any vehicle decisions are made, the owner or manager should consider a few policy issues regarding vehicles.
So who is it that requires the vehicle?
First step is to determine who needs the vehicle and which type of vehicle or how many are required? Give consideration to:
What is the mileage driven each year? How big of a territory will it travel? What is the size of the staff. What extras are involved such as air, adjustable power seats, power windows, hands-free phones, mapping devices, etc. Consider the type of vehicle required. Will it be a truck or car? What about both original or extended warranty. Consider carefully the size and number of samples that must be carried. What is the image that management wishes to portray to their customers. Cost of vehicle including all taxes as well as any special taxes on things like air conditioning, fuel mileage costs, cost of leasing the vehicle compared with cost of owning. Cost of repairing or refurbishing the vehicle back to it's original condition after a few years of wear and tear.
Working Capital:
It's wisdom to fully review the managements ability to meet all of the working requirements for financing or else leasing or in the case of a fleet, maybe a combination of both. This requires putting together some facts on a vehicle-by-vehicle basis.
If buying, you think about:
The total financial requirements for the vehicle including licensing fees, delivery fees and any processing costs. Don't forget any possible tax refund that might exist. Consider financing terms for example including interest rates, duration of loan, estimated trade-in value at the end of the financing term.
Consider if leased:
Consider any existing tax refund that may be available. Take into account things like the duration of the lease agreement with projection of the overall cost to term. The monthly cost licensing, delivery and processing costs, amount of cash required for deposit, security, (first and last etc,) and estimated additional costs for added mileage.
Management can then project the estimated expenses and cash flow on a vehicle-per-vehicle basis for the initial purchase or lease. A well thought out spread-sheet with estimates and annual summaries, under each of the following headings will provide an idea of the cash flow required.
A column for principal payment, a column showing the breakdown of interest payments (available with an amortization chart.) Leasing schedule (usually always from the dealer) specific tax payments (if they're not included) any insurance costs, the fuel costs, the cost of wear and tear for things not covered in the warranty such as snow tires or new tires, replacement parts like headlights, car washes etc.) And the estimated residual value
When complete, this type of detailed analysis will help the business owner to understand the monthly cash flow requirement to keep their fleet on the road. The spread sheet will often help you determine whether it is best to buy or lease or maybe do a combination of both.
Once cash flow needed for vehicle operations is determined, existing cash availability, business operating lines, and the last 12 months of cash flow need to be examined. Using historical information will assist in determining:
Make it easier to decide whether it is best to buy or best to lease the vehicle or a possibly even a combination of doing both. Whether or not making any loan from a financial institution will help curtail the firm's ability to meet the added upcoming expenditures. Sometimes tax issues do affect cash flow annually so management may wish to exclude their introduction into a cash flow module since the additional information may not be a great benefit in the process. The bottom line is to know if the company has the ability to manage cash required.
A well thought out vehicle policy that gives consideration to everything involved, can lessen unexpected fluctuations of working capital and improve earnings.
Any time a company provides an employee with a vehicle, both the employer and vehicle operator must realize that the vehicle is a both for earning income, but it also directly represents changes to the cash flow and profits too. Achieving a sense of responsibility can be accomplished by the management, by including the employee in the vehicle or fleet selection process. It also helps to share the facts concerning operations and vehicle expenses with the employee. But before any vehicle decisions are made, the owner or manager should consider a few policy issues regarding vehicles.
So who is it that requires the vehicle?
First step is to determine who needs the vehicle and which type of vehicle or how many are required? Give consideration to:
What is the mileage driven each year? How big of a territory will it travel? What is the size of the staff. What extras are involved such as air, adjustable power seats, power windows, hands-free phones, mapping devices, etc. Consider the type of vehicle required. Will it be a truck or car? What about both original or extended warranty. Consider carefully the size and number of samples that must be carried. What is the image that management wishes to portray to their customers. Cost of vehicle including all taxes as well as any special taxes on things like air conditioning, fuel mileage costs, cost of leasing the vehicle compared with cost of owning. Cost of repairing or refurbishing the vehicle back to it's original condition after a few years of wear and tear.
Working Capital:
It's wisdom to fully review the managements ability to meet all of the working requirements for financing or else leasing or in the case of a fleet, maybe a combination of both. This requires putting together some facts on a vehicle-by-vehicle basis.
If buying, you think about:
The total financial requirements for the vehicle including licensing fees, delivery fees and any processing costs. Don't forget any possible tax refund that might exist. Consider financing terms for example including interest rates, duration of loan, estimated trade-in value at the end of the financing term.
Consider if leased:
Consider any existing tax refund that may be available. Take into account things like the duration of the lease agreement with projection of the overall cost to term. The monthly cost licensing, delivery and processing costs, amount of cash required for deposit, security, (first and last etc,) and estimated additional costs for added mileage.
Management can then project the estimated expenses and cash flow on a vehicle-per-vehicle basis for the initial purchase or lease. A well thought out spread-sheet with estimates and annual summaries, under each of the following headings will provide an idea of the cash flow required.
A column for principal payment, a column showing the breakdown of interest payments (available with an amortization chart.) Leasing schedule (usually always from the dealer) specific tax payments (if they're not included) any insurance costs, the fuel costs, the cost of wear and tear for things not covered in the warranty such as snow tires or new tires, replacement parts like headlights, car washes etc.) And the estimated residual value
When complete, this type of detailed analysis will help the business owner to understand the monthly cash flow requirement to keep their fleet on the road. The spread sheet will often help you determine whether it is best to buy or lease or maybe do a combination of both.
Once cash flow needed for vehicle operations is determined, existing cash availability, business operating lines, and the last 12 months of cash flow need to be examined. Using historical information will assist in determining:
Make it easier to decide whether it is best to buy or best to lease the vehicle or a possibly even a combination of doing both. Whether or not making any loan from a financial institution will help curtail the firm's ability to meet the added upcoming expenditures. Sometimes tax issues do affect cash flow annually so management may wish to exclude their introduction into a cash flow module since the additional information may not be a great benefit in the process. The bottom line is to know if the company has the ability to manage cash required.
A well thought out vehicle policy that gives consideration to everything involved, can lessen unexpected fluctuations of working capital and improve earnings.
About the Author:
Allen H. Koroll is a York Region Chartered Accountant providing professional business solutions to small and medium-sized enterprises including accounting, auditing, taxation and business advisory services.. This article, Money Saving Tips to Reducing Vehicle Costs is available for free reprint.
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