Feature: Taxation & Funding: It’s budgeting time
Professor Colin Tourick explores the role and importance of budgeting for fleet managers.
Many companies are now busy producing next year’s budgets, so in this month’s feature, we will consider the fleet manager’s input to that process.
Step one is to look at what you are already committed to spend.
If you lease your vehicles on maintenance-inclusive contract hire you’ll just add up next year’s rentals. Otherwise you’ll need to work out next year’s depreciation charge, which should include an estimate of the likely sale proceeds of any vehicles to be defleeted.
If you pay service, maintenance and repair costs as they arise you will need to work out how much you will spend next year. If your fleet mix and the average age of your vehicles hasn’t changed, you’ll use this year’s costs as a starting point, otherwise you might use one of the commercially-available services to calculate these costs with greater accuracy.
Next you need to calculate the interest cost of funding the fleet. Finance Dept will advise the interest rate to use and the calculation methodology. (When leasing companies say that contract hire makes your budgeting easier, they do so with some justification…).
If you use services such as telematics, gap insurance, etc, you’ll need to project these costs too.
Don’t overlook Class 1A national insurance, which at 13.8% is a significant cost and which increases every year in line with the CO2-based benefit in kind (BIK) ‘appropriate percentages’.
Fuel cost is a big item in any fleet budget. You will have to consider how many miles your vehicles are likely to cover next year and estimate the cost of diesel and petrol per litre.
None of this work should be particularly onerous, particularly if your company assembles proper reports of fleet costs rather than splashing these costs across multiple accounts in the company’s books (which sadly happens too often).
Having assembled these costs and produced a preliminary budget, it’s time to get creative.
Soon, travel planning apps (apps similar to Bing or Google Maps) will calculate your route then arrange for you to be physically transported to your destination using the optimum mix of transport options. However, we aren’t at that stage yet, so as a fleet manager you should be the agent that ensures that all journeys are necessary, optimising cost, emissions, time and hassle.
How will you reduce the fuel bill?
The conventional answer was (and usually still is) to have a diesel-only policy, but concerns about NOx emissions may make you think twice. Some newer petrol-engined cars have great mpg and lots of oomph. Hybrids can reduce fuel costs but not for drivers who spend long periods on motorways, as the electric engine will rarely be used.
You could slash your fuel bill by moving to plug-in electric vehicles, particularly for drivers where range anxiety can’t be an issue, though these cars are still expensive.
Another good option is to require your drivers to justify (to themselves, and maybe to the company) every journey they take. No journey, no fuel cost.
How can you reduce your lease costs?
If you shop around for cheaper lease costs you may be surprised how little you could save across a basket of vehicles. Most leasing companies make only a small margin per vehicle, leaving little scope for discounting. If you get a cheap quote today it probably means the leasing company is more optimistic about the ultimate sale price of that vehicle than their competitors are (or that it will cost less to run), but this could reverse tomorrow. No leasing company can consistently undercut or be more expensive than the market – they’d be out of business soon enough.
You might consider using a different form of funding. Might finance lease, lease purchase or an employee car ownership (ECO) scheme work for you? After months of uncertainty some accounting firms are promoting new ways to operate ECOs. Time to consider your options?
The simplest way to reduce your lease costs is to operate fewer vehicles. Do all your ‘business use’ drivers need a company car? If they only drive little business mileage the cost per mile is high. Time to consider encouraging them to forego a company car, take a cash allowance and use rental or pool cars instead?
As we discussed last month, some company car drivers who are entitled to a cash allowance may be paying an elevated level of BIK tax (on the allowance, even though they’ve taken the car) under the new OpRA rules. If they don’t do much business mileage a move to a cash allowance might be a win for everyone (other than the taxman).
How can you reduce your employees’ BIK tax charges (and therefore the company’s Class 1A contributions bill)?
This one is easy – reduce the maximum CO2 level for new company cars every year.
How could you reduce your fleet’s CO2 emissions?
Set a CO2 cap, ensure drivers are only taking necessary journeys and make them aware of the increases in BIK tax that have already been announced.
Are there more effective ways for your employees to get from A to B?
For a van driver the answer will usually be no, but for a car driver it may be yes. They need to consider all travel options available to them. For example, before someone drives their company car from the office to a client, wouldn’t it be sensible for them to consider driving one of their colleagues’ cars if it offered higher-mpg, lower emissions and a lower cost per mile?
There are many other ways to reduce fleet costs, including introducing mileage claim audits, bunkering fuel, moving from user-chooser to a narrower range of cars, moving to a dual or solus badge deal, fitting telematics units to monitor vehicle use, changing the basis of your motor insurance policy, reducing accidents, finding ways to boost vehicle sale prices on vehicles where you have residual value risk, ensuring your mileage allowances are not too high, etc. The list is endless…
The trick is to come up with the cost savings before the FD asks you to do so!