Managing the Financial Side of Commercial Fleets

Maximizing Oversight with Minimal Overhead

Spend management is all the rage in today's business world. Employees spend the company's money in myriad ways, for numerous reasons. Here's how fleet managers can contribute to the reduction effort.

November 2011, by Staff



At a Glance

There are several key elements to successfully managing employee spend, without taking on additional administrative overhead:

  • Know what the spend is - you can't manage what you don't see.
  • Use fleet programs - most fleet suppliers provide a full menu of fleet and fleet-related programs.
  • Make full use of any controls these programs offer to prevent wasteful spending before it

The terms have changed over the years expense control, expense management, cost reduction, cost control. Today, the new buzzwords are "spend management," Whatever the phrase, it all comes down to the same thing: prudent oversight of the company's money, no matter what the purpose may be.

For fleet managers, this means what the drivers spend to operate and care for their company vehicles. It can also include other travel-related spending, such as meals, lodging, entertainment, and airfare. Thousands of dollars, over each year, for each driver add up to millions in spend. It's a tough challenge, but there are ways to manage spend without breaking the bank in overhead.

Why Spend Management?

This question often arises: Why worry about spend management? The answer is a simple one. There are only two ways a business can improve the bottom line: It can increase sales (sell more or raise prices) or it can reduce costs.

Say your company operates at an after-tax margin of 5 percent. To generate an additional $1 in profit, sales must be increased by $20. However, reducing cost by $1 results in $1 in additional profit.

The point is, every dollar of reduced cost drops straight to the bottom line, while a dollar of increased sales only increases profits by a nickel. Thus, the never-ending emphasis management places on cost reduction.

A major component of cost reduction is managing how the company's money is spent. Thus, spend management.

At a 5-percent profit margin, a company spends most of what it receives in revenues. Costs of goods sold (including raw materials, labor, benefits, and other general and administrative costs), and taxes.

Companies have accountants to manage tax provisions, which leaves managers and department heads to manage the rest. Sometimes, managers lose sight of the fact that whenever a company spends more than it produces in cash flow, the balance must be borrowed, adding more cost (interest expense) to the profit and loss statement. It isn't their money: the checks always clear, suppliers get paid, and so do employees. This can be a dangerous attitude if allowed to continue unchecked.

As a prelude to spend management (specific to the manager's responsibilities), managers and executives must be held responsible for cash flow, dollars in and dollars out, and understand that if the business were their own and there wasn't enough in the bank to pay the bills (and the employees), they'd either have to borrow to do it, or delay payments.

Differences in Fleet Spend

What, then, makes up fleet spend? Exactly what dollars go out to pay for what? Defining fleet spend begins by dividing overall costs into two broad categories:

• Fixed costs are related to the acquisition and ownership/lease of the vehicle, which include lease payments, capital expenditures (if owned), interest expense, insurance, and tax/title/license.

• Variable (or operating) costs are associated with the operation of the vehicle, which include fuel, maintenance/repair, tires, and tolls.

The next step is understanding that a fleet manager cannot manage an expense or spend unless he or she knows what it is, meaning data capture. The ownership/lease and operation of a fleet of vehicles generates a great deal of data - including dates, times, and type of spend.

The data for fixed costs can be captured quickly and easily, without a great deal of administrative effort. If the fleet is leased, this data is captured via the lessor; if owned, internal controls can be used (i.e., depreciation reserve and interest expense can be captured internally once it is set up electronically). Insurance costs are usually established via accrual for physical damage (if the fleet is self-insured), and premiums for purchased insurance billed by the chosen carrier.

Variable expense, by its very definition, is more difficult to capture. Such expense varies widely by individual vehicle, depending on a number of factors, including geography, mission, mileage, and the driver. In the early days of fleet management, most variable costs were captured via individual expense reporting. Drivers drove, purchased fuel, paid tolls, got oil changes, paid for it out of pocket, and submitted an expense report which included odometer readings.

Fleet managers had to have a system into which this data was input for review and control. Fortunately, there are now many more payment options available to drivers, and the process is far more automated.

Currently Available Programs

What are the current payment options? Most fleets know fleet programs exist that they can use for the drivers' convenience that also makes data capture (and therefore spend management) simple and routine.

Fuel spend is the single largest variable fleet expense. Depending on pump prices, it can make up as much as 70 percent of variable costs, perhaps more. A typical fleet will spend approximately $3,000 to $4,000 per year, per vehicle for fuel at today's prices. It is also the spend that occurs more frequently than any other, as drivers purchase fuel several days a week, and, in some cases, every day. Fleet fuel-card programs allow drivers to purchase fuel whenever necessary, and provide fleet managers access to the detail these transactions produce, individually and fleet-wide.

Fleet maintenance, repair, and tire expense is less regular; however, individual transactions are much larger than those for fuel. Here, too, there are maintenance management programs that provide a national network of repair facilities, centralized billing, and detailed data capture and availability.

These programs fill the requirement that fleet managers must capture all necessary data to properly and effectively manage spend, without piling on administrative expense. Some of these programs will carry fees for use, which, of course are negotiable depending upon the size of the fleet (and the spend).

However, just having access to data is only the first step in managing spend. Fleet managers manage data, but they also manage behavior. Using and implementing the controls and features of these programs is the next step.

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