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.
When an employer provides an employee with a vehicle, both employer and employee must realize the vehicle is a resource for earning income, but the costs directly affect cash flow and profits too. This sense of responsibility can be achieved by including the employee in the selection process and sharing facts concerning operating expenses. But before the vehicle is chosen, the owner/manager should consider a few general policy issues regarding vehicles.
Which staff requires the vehicle?
The first step is to determine who needs the vehicle, what kind and how many for the geographic area to be covered? It may be prudent to consider:
The number of kilometers or miles driven per year. The physical size of the sales staff. Creature comforts required such as air conditioning, adjustable seats, power windows, hands-free phones, mapping software, etc. Type of vehicle required. Original and extended warranty coverage. Size and quantities of samples that must be transported. The image that the company wants to portray to customers. Fuel mileage Cost of vehicle including all taxes as well as any special taxes on things like air conditioning Cost of leasing the vehicle compared with cost of buying. Cost of returning the vehicle to it's original condition after wear and tear.
Working Capital:
The next step is to review the companies ability to meet working requirements for financing or leasing. This requires gathering some hard numbers on a vehicle by vehicle basis.
Consider if purchased:
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.
If leased, consider:
Any tax refund that may be available and the duration of the lease agreement with projection of the overall cost to term. The monthly cost licensing, delivery and processing costs, amount of deposit required, security, first and last etc. Any tax refund that may be available and the duration of the lease agreement with projection of the overall cost to term, the deposit amount, if any to be refunded 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.
Principal payment, interest payments (available with an amortization table.) Lease payment (obtainable from the dealer) Tax payments (if not included in principal or lease) Insurance costs Estimated Fuel costs Wear and Tear cost outside of warranty (example new tires, lights, car washes etc.) Estimated residual value
This type of spreadsheet when complete will help the manager know about of the monthly cash flow to keep the vehicle or fleet on the road. The spreadsheet can also be quite useful in decisions of whether it is best to buy or lease.
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.
Remember, that being well prepared with a clear vehicle policy that gives thought to everything involved in the overall picture, can reduce unwanted fluctuations of working capital and it can improve earnings.
When an employer provides an employee with a vehicle, both employer and employee must realize the vehicle is a resource for earning income, but the costs directly affect cash flow and profits too. This sense of responsibility can be achieved by including the employee in the selection process and sharing facts concerning operating expenses. But before the vehicle is chosen, the owner/manager should consider a few general policy issues regarding vehicles.
Which staff requires the vehicle?
The first step is to determine who needs the vehicle, what kind and how many for the geographic area to be covered? It may be prudent to consider:
The number of kilometers or miles driven per year. The physical size of the sales staff. Creature comforts required such as air conditioning, adjustable seats, power windows, hands-free phones, mapping software, etc. Type of vehicle required. Original and extended warranty coverage. Size and quantities of samples that must be transported. The image that the company wants to portray to customers. Fuel mileage Cost of vehicle including all taxes as well as any special taxes on things like air conditioning Cost of leasing the vehicle compared with cost of buying. Cost of returning the vehicle to it's original condition after wear and tear.
Working Capital:
The next step is to review the companies ability to meet working requirements for financing or leasing. This requires gathering some hard numbers on a vehicle by vehicle basis.
Consider if purchased:
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.
If leased, consider:
Any tax refund that may be available and the duration of the lease agreement with projection of the overall cost to term. The monthly cost licensing, delivery and processing costs, amount of deposit required, security, first and last etc. Any tax refund that may be available and the duration of the lease agreement with projection of the overall cost to term, the deposit amount, if any to be refunded 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.
Principal payment, interest payments (available with an amortization table.) Lease payment (obtainable from the dealer) Tax payments (if not included in principal or lease) Insurance costs Estimated Fuel costs Wear and Tear cost outside of warranty (example new tires, lights, car washes etc.) Estimated residual value
This type of spreadsheet when complete will help the manager know about of the monthly cash flow to keep the vehicle or fleet on the road. The spreadsheet can also be quite useful in decisions of whether it is best to buy or lease.
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.
Remember, that being well prepared with a clear vehicle policy that gives thought to everything involved in the overall picture, can reduce unwanted fluctuations of working capital and it can 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.