Fleet News

Cash warning to fleets over residual value and depreciation confusion

FLEET managers risk losing a fortune because of confusion between residual values and depreciation, an industry expert claims. A well-worn saying that a used car is only worth what a car buyer will pay for it is being hammered home to fleet managers amid debate about the 'true' residual values of vehicles.

Fleets that rely on predicting a future value of vehicles solely by estimating its percentage compared to benchmark cars could be overestimating values in real terms by hundreds of pounds. Even for small car fleets, the costs can play havoc with carefully planned budgets.

Most residual values are calculated on a percentage of list price, but that percentage must be backed up by a cash value, according to Stewart Whyte, managing director of Fleet Audits. He said: 'The use of percentages is a very valuable tool, but it is only a derivative tool and must never be considered as a driver in its own right. The problem we have in the fleet industry is making assumptions about residual value percentages which are quite unsupportable, and this sloppy attitude helps lead to residual value problems.'

For example, a fleet manager might assume that an upper medium car would have a benchmark residual value of 30%, without taking into account the list price of the vehicle being considered. So if it was a particularly high specification vehicle, a fleet manager may have estimated its future value at 30% of its high-spec list price. A used car buyer, however, may not pay a supplement for the extra equipment, and offer the equivalent of 30% of the list price for a standard specification model. This would effectively reduce the residual value, when expressed as a percentage of list price, and lead to a cash shortfall in fleet budgets.

Residual value experts have backed Whyte's warning. Ramesh Notra, CAP Monitor economics editor, said: 'The way we approach future residual values is in its purest form. We examine actual prices achieved and percentages based on the new value will be added last of all.' Adrian Rushmore, managing editor of Glass's Guide, agreed, added: 'If you slavishly follow percentages when looking at residual values, you can be inaccurate on the future value of cars. Always look at the cash value.'

And BCA's Tom Madden said: 'A residual value is a simple and straightforward figure - it is where the bidding stops. It is the amount that someone is prepared to pay with real money to own that particular vehicle. Our experience tells us that there are three critical factors in deciding the used market value of any vehicle - the cost new, the vehicle itself and how that vehicle is remarketed.'

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