Businesses that want to trim expenses and improve cash flow should start by assessing their fleet of vehicles—especially if they have mid-size fleets of 15 to 125 vehicles.
T.E. Smith & Son, Inc., a family-owned mechanical contractor in Salisbury, Md., that specializes in commercial and industrial plumbing, and heating and air-conditioning sales and service, decided approximately four years ago to switch from owning vehicles to leasing on a four-year cycle. Dave Smith, president of T.E. Smith, says his only regret is that he did not make the decision to lease 10 years earlier.
“Switching from owning to leasing has generated savings on everything from vehicle acquisitions to maintenance,” says Smith, who currently leases 25 vehicles. “Today, I have five trucks in operation for the same price that I used to pay for just two trucks. Leasing has turned out to be a significant factor in controlling costs for our company.”
Smith says he used to spend too much time trying to manage his fleet, including outfitting each vehicle with bins and racks. “By working with a professional fleet management company, they make sure every vehicle is delivered with the right color and with bins and racks already installed, giving me more time to focus on growing my business and servicing customers instead of managing a fleet of vehicles.”
A maintenance management program has drastically reduced expenses as well. The program provides economical, timely and high-quality repairs, in addition to regularly scheduled oil changes and tire, brake and glass replacements. “We receive maximum warranty benefits, as well as rebates, price breaks and other opportunities to minimize expenses,” Smith says. “By keeping vehicles properly maintained, we have less downtime and increased operating efficiencies, which is critical to maintaining a competitive advantage in our industry.”
Leasing can make sense for contractors that analyze their fleet expenses in terms of both capital structure and operational efficiencies. Capital structure is the mix of debt and equity used to fund assets, such as a fleet of vehicles, while operational efficiencies can refer to the cost of acquiring, using and disposing of vehicles.
Because every company brings its own unique circumstances to a lease/buy decision, companies should consult with a professional financial advisor to objectively determine the effect leasing can have on their overall capital structure.
Factors should include everything from hard costs to soft costs, and an analysis to determine if it makes sense to manage the fleet internally or outsource it to a professional fleet management company.
How Does Leasing Affect Capital Structure?
Vehicle ownership can unnecessarily burden a business’ balance sheet. As with all capital expenditures, buying vehicles requires two entries on the balance sheet. While the asset side gets the vehicles, the liability side gets the debt. On the other hand, because a properly structured lease transaction permits off-balance sheet treatment, the overall lease obligations do not appear on the balance sheet (with certain assumptions about the lease terms).
With leasing, a business can avoid incurring additional debt to fund a large capital expenditure. In addition, by establishing adedicated credit line, a business can reduce the amount of debt needed and prevent it from being over-leveraged. This is especially important because it allows companies to maintain a low cost of capital by having an appropriate debt/equity ratio, thus enhancing the value of a business. The separate line of credit also allows a business to finance growth using its current operating cash flows and line of credit.
Additionally, by requiring a smaller capital expenditure upfront, leasing can effectively give a business more funds to use for operations, equipment, personnel or other investments.
How Does Leasing Affect Operational Efficiencies?
Working with a fleet management company can reduce the hard and soft costs associated with the administrative side of fleet purchases, including the time business owners, managers and employees spend on acquiring and disposing of vehicles, as well as managing maintenance appointments, insurance, and vehicle registration and reporting.
Additionally, unlike traditional forms of financing or an outright purchase, most leases do not require a complete payback of the principal balance of the vehicle. With an open-end lease, a business may be able to minimize net depreciation during the life of the vehicle. Not only can a fleet management company establish proper residual values, but it also may be able to sell the vehicle for the highest amount possible, with the profit from the sale going back to the customer.
Holding onto vehicles with high mileage can mean increased maintenance and fuel costs, frequent breakdowns and expired warranties, which may prove more expensive due to missed appointments and lost productivity.
A good replacement strategy monitors vehicle type, age and maintenance history, as well as looks at future trends, the current used vehicle market, warranties, mileage, and the potential wear and tear on each vehicle.
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Friday, September 3, 2010