If I were to ring you and suggest a fleet review was a good idea, how high would you place it on your list of priorities? If, on the other hand, I were to suggest that we had some new ground breaking method of finance that would save you millions, curiosity would probably secure me a meeting.

In our last article we laid out the framework we have developed to ensure a successful fleet review, but I am often amazed by companies who ignore the first and possibly most important step, establishing the current costs of running their fleet.

What income and expenses should you consider?

• Purchase and disposal values
• Rentals or repayments
• Direct and indirect tax reliefs
• Administration (driver and company)
• Excess mileage and refurbishment charges
• Disposal costs
• Service and repairs
• Business and private fuel
• Insurance

Gathering the above data (bearing in mind the list may not be definitive) will no doubt involve input from many parties within the organisation, but, when it is complete, the process of looking for better ways of doing things can begin.

If we assume that the company currently buys all cars over £20,000 but wants to consider another method of acquisition, it is firstly vital to consider the effect that the change in funding will have on the company’s cashflow timings and amounts. Or to look at it another way, will it better to use third party funds rather than your own? To compare the two different funding methods take each method separately, identify the timing and amount of all of the cashflows and then calculate them in today’s terms (discounted cashflow). This method brings all cashflows to a total figure expressed in today’s money (net present value). Once you have a total net present value for each financing option, you can properly determine the one with the lowest total cost. By using this technique it is possible to value a range of products by their ultimate cost, and then the real fun begins by considering their non-financial benefits. Factors such as the effect on the company’s balance sheet, whether you want the risk of the ownership of the cars, or whether you want to spread payments rather than have a large payment up front may be a few of your non-financial considerations.

Should the company carry out this exercise for all of its cars or will just a couple of examples do?

Realistically if you have a thousand cars in the fleet that are all different the task ahead of you would be mammoth. It is a good idea to handle the exercise by taking typical examples or benchmark cars, but ensure that you use exactly the same car and terms for the comparison. It would not be a useful exercise to consider the cost of a three-year leasing contract for a Mondeo against the four-year cost of buying a BMW. Using benchmark cars will not generate the exact same result as analysing the whole fleet but it will produce a very reasonable overall average. Another issue you may find is that for some cars analysed, the best funding method may be leasing but for others the best funding method may be outright purchase. At this point you may need to decide whether one policy for the whole fleet is the best option, or whether multiple funding methods are the way forward.

Do we need to use a computer program to get the right results?

Unless you are comfortable with huge sheets of paper, and have a heap of very sharp pencils, you will find that the sheer number of tricky calculations required, may take you forever. More importantly, you will want to perform sensitivity analysis on the figures, by flexing estimates to see the overall effect on the numbers. This would be impossible to do without a computer program.

Why worry about fuel and insurance when they do not change regardless of the method of finance?

When deciding what cashflows to bring in to the analysis, only include those which differ for each funding method. For example administration costs will be higher if you buy the cars yourself rather than lease them. However, the cost of insuring the car will be the same whether you outright purchase the car or lease it so it would be a waste of time and effort to include it in the analysis. One point to note is that if you are considering offering some form of cash alternative, the company’s insurance costs may well be different from the drivers’ total insurance costs and this can have a significant bearing on the results. Be thorough in determining the income and expenses to include, but be selective. There is no point doing work which doesn’t need to be done.

David Rawlings
Senior Manager
Deloitte & Touche