CAR LEASE

News - 2009 Archive

Why Your Fleets need whole life costs

Everybody’s talking – Why your fleets needs whole life costs

While lots of businesses are talking about the benefits of whole life costs as a basis for fleet choice, surprisingly few seem to be actually doing it, according to Clive Buhagiar, development manager at top ten fleet management company, ING Car Lease.

Like the lines of that song by Harry Nilsson, Everybody’s Talking, too many businesses are merely paying lip service to the concept of whole life cost (WLC) analysis, with relatively few really embracing the relatively straightforward methodology. This is a great shame, as work we have recently completed with several company fleets have shown that a thorough analysis of their fleet can save them significant sums of money, while offering company car drivers a better choice of car.

While the idea of whole life costs has been put on the backburner in recent years, as other issues such as corporate manslaughter, fuel costs and the economic downturn have taken centre stage, now is the time to act. The new tax regime that will affect rental and capital allowances is due to be enforced in April 2009, giving companies little time to act if they want to minimise the potentially huge financial impact these moves could have on their fleet costs.

Faced with significant increased company cars taxes come April 2009, what can businesses do to prepare for the changes? Firstly, we need to get back to basics and look at how most businesses still acquire their company vehicles.

Strange as it may seem, most UK companies still use outright purchase – cash in the bank – to buy their fleets. Most companies look at purchase price of the car as the main indicator of the cost of the vehicle, without really assessing the actual cost of running and disposing of the car over a 3 or 4 year period. Then there are those companies that claim to have embraced the WLC mantra, by including the residual value (ie the resale value of the car at the end of the term) in their calculation.

However, the real art in developing a more meaningful WLC model involves calculations on NI Class 1A, fuel costs, insurance and from April 2009 the new net tax position that takes into account a car’s CO2 emissions.

We recently undertook a whole life cost analysis on two cars, both executive models, costing £25,000 and £23,000; one a 2 litre diesel, the cheaper a 2.5 litre petrol saloon. On the face of it, many companies would go for the 2.5 litre petrol car, based on the fact that it is £2,000 cheaper than its diesel equivalent. However, once you begin to delve deeper into the implications of running the car over a four year period, you soon see that purchase price can be a very poor indicator of the true cost.

Once items such as fuel economy, the cost of business mileage, carbon emissions and NI class 1A costs are factored in, the ‘cheaper’ car costs a staggering £7,000 more to acquire and run over a four year period. Granted, these figures were calculated before the recent hikes in fuel prices were reduced, but these calculations still show how fleet choice on the basis of whole life costing can save fleets thousands of pounds.

Although it is an extreme example, imagine if a fleet of say 200 cars had been wrongly ‘speced’ to this degree? Moving from the £23,000 priced petrol to the £25,000 petrol car could save a business up to £1.4m over a four year period!

Clearly, in the current economic downturn, businesses need to look at ever way possible of reducing outgoings and adopting the whole life cost methodology would appear to be an absolute ‘no brainer.’

With the new tax regime fast approaching there’s never been a better time to re-evaluate your fleet provision. Whether a blue chip plc or growing SME, there are three key activities that should be done now.

One: Carry out a quick and simple analysis of your fleet funding. How are you financing your cars? Is it the most cost effective, tax efficient way of doing it? Have you looked at the alternatives of contract hire, leasing and contract purchase?

Two: Undertake a more sophisticated review of your fleet in terms of whole life costing. The above example shows a stark difference, but our experience shows that many companies are getting this simple aspect of fleet choice horribly wrong - costing them dearly and restricting driver choice unnecessarily.

Three: Take a fresh look at what your company car drivers actually need to drive and what their aspiration level is. The beauty of good whole life costing is that what is good for the company is also good for the driver. Better benefit in kind costs means that the business gets a lower tax bill, as well as the drivers themselves. Now there’s a win:win you don’t hear about very often!

Clive Buhagiar is development manager at top ten fleet management company, ING Car Lease.