3 Steps to Developing & Controlling a Fleet Budget
This article explains how to prepare a fleet budget in three easy steps. Step one, develop cost assumptions. Next, determine line item expenses. Finally, correct the variances between budgeted and actual costs.
To effectively manage corporate funds and assets, a fleet manager must have the ability to prepare, present, and implement a sound budget. There are three essential steps to creating a fleet budget and determining key line item expenses.
The number one question posed by a novice budgeter is, "Where do I start?"
The best place to start is with an accounting of the previous year's actual expenses contrasted against that year's budget. However, when preparing a new budget, some managers apply the "X percent rule," which simply means adding "X" percent to the cost of each of the prior year's line items. This approach usually doesn't work since it doesn't take into account past, present, and future forces that may impact your projected budget expenses.
There is no such thing as a 100-percent accurate budget. Since you are budgeting for an unknown future, it's important to recognize that a budget will be constantly in flux.
Step 1: Determining Cost Assumptions
When developing a budget, it is important to recognize there are internal and external forces over which you may or may not have any control, but will impact your budget. These forces vary depending on the type of business your company is engaged in. Ask yourself:
■What past factors influenced last year's budget?
■What factors are present today that may impact the budget you are currently working on?
■What future developments may affect your upcoming budget?
When anticipating future factors, recognize they are simply "guesstimates" since no one can predict the future with a degree of accuracy. However, you need to be aware of what may be just over the horizon to minimize financial surprises.
It is necessary to document in writing your cost assumptions concerning factors that may cause fleet expenses to change prior to determining the line item dollar amounts in your budget requests.
By going through this procedure and documenting your assumptions as to why these costs may increase or decrease, you've built a document that substantiates your budget request. If someone questions your numbers, all you must do is refer to your documented assumptions as to how you arrived at those dollar figures. Documenting assumptions about how costs were derived provides the fleet manager an effective means to defend budget requests. However, if your assumptions are faulty, so too will be your budgeted numbers.
Step 2: Determining Line Item Costs
Key line items in a fleet budget are:
■Leasing and fleet management fees (if the fleet is leased).
■Personal use chargebacks.
■Resale or disposal adjustment.
These line items do not represent all expenses that may appear on a budget, such as taxes, insurance, vehicle licensing, and administration, but they do represent elements crucial to developing a fleet budget.
Capitalized Cost Is Key
The core of the entire fleet budgeting process is determining the fleet's capitalized cost. You cannot determine depreciation expense without first calculating the capitalized cost of the fleet, since this dollar base is depreciated over an accounting period. Specifically, depreciation is the portion of the fleet's capitalized cost you will expense over a specified period of time or vehicle use.
Another way to define capitalized cost is the total dollar amount the fleet of vehicles will cost your company at acquisition. This is the most critical number in your fleet budget.
Vehicle Depreciation Line Item
Determining the depreciation factor for your fleet - namely, the number of months you want to write off your vehicle acquisition costs - is the next crucial step in preparing a fleet budget. This depreciation period can vary depending on your company's accounting procedures.
For instance, some company-owned fleets use a 36-month depreciation period. Since cash is expended at the time of acquisition, the company attempts to write off the asset cost as quickly as possible. A faster write-off rate tends to increase a company's profits by lowering the taxes it must pay during the write-off period.
On the other hand, when a vehicle is leased, a company usually seeks a longer write-off period to obtain lower monthly payments. For the sake of illustration, a leased fleet may use a 50-month depreciation period, which means the full capitalized cost of a vehicle will be written off over 50 months.
Now that you know your fleet's total capitalized cost, depreciation is very easy to calculate. Multiply the total capitalized cost by your depreciation factor, which will equal your annual depreciation.
Interest Expense Line Item
Regardless of whether you purchase or lease vehicles, you will pay interest on the unpaid portion of the vehicle's acquisition cost (book value) funded by a third party.
The first step is to determine the loan amortization factor, which, when applied to the total fleet capitalized cost, yields the average loan principal financed for the budget year. To determine this, you need to know the average months-in-service.
Now you must add an interest rate to this loan balance and forecast an average interest rate for the next budget period. The basis of your interest rate projections should be outlined in writing in your previously prepared cost assumptions.
If your vehicle is leased, the leasing company normally provides interest rate projections. If your company purchases its vehicles using company funds, ask your corporate treasurer's office for information on the company's internal cost of funds.