Fleet News

Fleet funding: Saving cash on wholelife costs

MINOR changes to the way fleets are run can help streamline costs – but it is by looking at the bigger picture that fleets can make significant savings.

Analysing fuel costs, introducing driver training and improving administration are just a few ways fleets can chip away at budgets and improve fleet management.

But when it comes to choosing vehicles, the entire process must revolve around using wholelife costs as the most important financial criteria.

This takes into account servicing, maintenance, fuel and depreciation costs and can also include a contingency fund to cover average additional repair costs.

Tony Greenidge, head of sales at Hitachi Capital Vehicle Solutions, said: ‘It seems odd that companies drawing up their final car choice lists still concentrate on the traditional core areas of finance and maintenance.

‘It is only a matter of time before fleet managers move to wholelife costs as the sole criterion for assessment of company cars, with more seeking to examine all the details of their cost base.

‘The growth of sophisticated online cash versus car calculators has shown the fleet industry that technology has the potential to provide real answers to straight cost questions.

‘It is inevitable that this technology will have to be developed further so true wholelife comparisons, specific to individual fleet policies, can be made on company vehicles, flushing out previously buried costs such as company and private fuel and class 1A National Insurance liabilities.’

One of the reasons fleets are failing to use wholelife costs to evaluate vehicles is uncertainty over tax implications, according to Greenidge.

He added: ‘The slow progress towards wholelife cost evaluation is that for many companies, the tax costs of providing a company car are not included in fleet budgets and there is no real ownership of the cost. It is merely accepted by finance departments that tax has to be paid.’

However, with the growing recognition of Class 1A National Insurance as a major contributor to wholelife costs, companies will want to examine their fleet costs further.

He said: ‘The move towards more open fleet choice means that many ‘off the shelf’ on-line quote calculators will not serve much purpose for fleets that want to move to wholelife cost evaluation and yet still keep open and attractive car policies.’

Greenidge believes things are set to get even better for fleet decision-makers by negotiating better deals for new vehicles using wholelife costs as a benchmark for value.

He said: ‘While the traditional methods of reducing fleet costs by restricting choice, negotiating better terms with manufacturers or squeezing the leasing company will continue, the ability to enter into negotiations and make comparisons based on wholelife costs will be much more relevant and powerful.’

Greenidge added: ‘Going forward, I believe fleet decision-makers will expect their vehicle providers to deliver and manage bespoke on-line solutions that will enable the driver to go through a complex ‘wholelife’ evaluation and ordering process.

‘Employers will want the ability to provide drivers with access to accurate vehicle choice information with the comfort of knowing that whatever is selected was within a totally controlled cost base. This is the Holy Grail employers want and will soon expect.’

Finding the right funding formula

FUNDING methods are very much an individual choice. What works for one fleet may not for another depending on a host of factors such as the fleet size, budget limits and company policies.

Making the correct funding choice can mean saving thousands of pounds in the long term and fleets need to choose a funding method depending on their circumstances.

Neil Davies, technical director at Car Benefit Solutions, said: ‘Companies offering company car benefits to employees need to consider a number of different factors when deciding on the appropriate method of funding.

‘The main factors to consider are cost, risk and impact on the performance measurement criteria of the business.’

Although the majority of large fleets outright purchase vehicles, Davies claims there has been a shift away from this type of funding in recent years.

This has been due to a number of factors. Fleets want to avoid residual value risk and opting for fixed cost leasing pushes that risk on to the vehicle provider. Leasing also means that a heavily depreciating asset doesn’t need to sit on the balance sheet.

Fleets wishing to move away from outright purchase are likely to look towards contract hire, leasing, employee personal leasing or employee car ownership (ECO) schemes.

Davies said: ‘For smaller companies, the usual method of funding has been contract hire. The advantages of this funding method are that the leasing company is taking the risk on residual values, there is no balance sheet presence in relation to the cars and the leasing companies can, if required, provide all fleet management.

‘The fact that there is no balance sheet presence enhances ‘return on asset performance’ indicators which are becoming increasingly more popular. There are, however, certain ‘hidden’ costs of contract hire as a method of funding when compared to outright purchase.

‘These include restriction of corporation tax relief on expensive vehicles, i.e. those costing more than £12,000, and early termination penalties that are typically 50% of outstanding rentals, although the latter can be mitigated through commercial arrangements.’

By operating employee personal; leasing and car ownership schemes, fleets can reduce overall costs and pass some of the risks and costs of early termination and excess mileage on to the employee, who can in turn obtain insurance to cover the risk.

But these schemes will not suit every fleet. Davies said: ‘These arrangements are not suitable for all companies as the economics depend on the sensitivity of certain fleet variables and profiles such as type of benchmark vehicle, level of entitlement, along with total and business mileage.

‘Due to the complex nature of these arrangements it is recommended that a full due diligence exercise is conducted to establish the total cost, including all secondary taxation costs, before a decision is made to implement such a scheme.’

Before deciding on a funding method, fleets need to weigh up the pros and cons of each.

It is a lot more than looking for the cheapest price or the lowest leasing rate on a vehicle and fleet executives need to assess their own fleet operations before identifying the best funding method.

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