Believe it or not, many operators in the livery industry do not have a formal budgeting process. Perhaps they already have a good handle on expense management or do not have a need for management incentive programs in their organization. However, a budget serves two other functions that should be on the top of everyone’s priority list: fleet management and cash flow forecasting. In this blog post we’ll focus on fleet management, which is imperative to the long-term success of your operation.
Vehicles can be tricky to manage, because while everyone is well aware that they are the foundation of the business, their impacts are not fully reflected in the profit and loss statement. Further, the perceived ease of receiving auto financing can produce a false sense of security. Lack of fixed asset management, or fleet planning, can cause undue stress on company cash flows.
Here are the top 10 reasons you should be performing fleet planning thoughtfully and regularly:
Down Payments – While it may be tempting to take advantage of no or low down payment auto financing options, it is always best to invest in a down payment to reduce interest costs over the life of the loan and accumulate some equity in the vehicle. This is especially important if there is a chance you may sell the vehicle before the end of the loan term.
Loan Payments – Monthly loan payments are not reflected on the profit and loss and can therefore be overlooked during financial review. When planning fixed asset turnover, the monthly payments should always be considered to avoid winding up in a negative cash position, particularly in slower months.
Ability to Receive Financing – Banks generally do not like to see high amounts of debt taken on in a short period of time, so staggering new vehicle purchases over a number of years will ensure that financing will be available when you need it.
Interest Rates – Another way to reduce interest expenses is to ensure that you’re getting the best available market rates on your new loans. Adhering to points 1 and 3 above will have high-quality lenders competing for your business and will allow you to stay out of the sub-prime markets.
Emergency Situations – Cash reserves resulting from solid fleet management practices will provide you with a cushion in emergency vehicle replacement situations, such as when a vehicle is totaled by an insurance company but the full value is not recovered.
Fleet Quality – High fleet quality and appropriate turnover is the basis for demanding the most profitable rates from customers. A proper replacement schedule guarantees there are several like-new vehicles in the fleet at any given time and can also smooth maintenance costs from year to year.
Tax Benefits – 100% bonus depreciation has been a huge tax benefit in the industry over the past several years. Planning vehicle purchases to match expected net income can allow you to realize the highest level of benefit possible.
Shopping the Best Deals – Planning your fleet purchases early for the year allows you the time to shop around locally or at trade shows and other industry events for the best deals. You’ll also have time to bargain if necessary.
Avoid Spur of the Moment Purchases – If you have ever struggled with purchasing new vehicles and then finding a few months later that your new purchase has strapped your cash flow, having a roadmap to follow can alleviate that risk.
Controlled Growth – When you’re ready to expand into a new market, such as shuttle or motor coach, a larger down payment and cash reserve will be required to avoid placing strain on existing business profits. Planning for that growth will be a key factor in overall success.
Realistically, fleet planning will not be perfect, but over time and with practice, it will improve. Awareness alone can have clear favorable impacts on cash flow, so even an informal brainstorming session will add immediate value.
Don’t let a lack of fleet planning sink your cash position – if you’d like to speak with Jessica in further detail on the subject, e-mail her at jessica@lmc.group.