Fleet Management: Control Costs and Enhance Your Business Image

In any economy, smart business owners look for ways to ensure that their businesses are running at peak efficiency. This has been even more evident in the past few years, as many companies have placed an increased importance on controlling costs, as well as enhancing their company's brand image.

For many businesses, a fleet of vehicles represents one of their largest costs, requiring a considerable amount of money upfront and demanding a continuing amount of time and resources to manage. But with sound planning and effective fleet management, controlling the costs of owning and running a commercial fleet is something that all business owners can accomplish.

One way to start controlling fleet costs is to look into the different ways to acquire vehicles. Leasing cars, vans and light duty trucks under a tailored fleet management program can be an alternative to an outright or financed purchase.

Leasing Comes with Options

For business owners who decide that leasing presents an affordable alternative to an outright purchase, it is important to consider the different types of leases. There are two primary types of leases: open-end leases and closed-end leases.

• Open-End Lease-With an open-end lease, the business has a vested interest in the leased vehicle at the end of the term. When this type of lease is established on a vehicle, the vehicle is usually purchased for a specific customer and customized for the business's needs, and both the business and lessor have a mutual interest in the vehicle at the end of the lease term. If the vehicle sells for more than the Reduced Book Value (RBV), the profit goes to the business. If the vehicle does not sell for an amount equal to the RBV, the business must pay the difference between the sale price and the residual. Thus, with an open-end lease, customers share in the benefit of the vehicle's value at the end of the lease-or in the risk.

Often, at the end of an open-end lease, a knowledgeable fleet services provider will be able to sell the vehicle for an amount that is higher than the vehicle's actual worth, and the profit from that sale will go back to the customer.

• Closed-End Lease-In a closed-end lease, the customer is not held responsible at the end of the lease for the difference between the vehicle's residual value and sale price. The customer is only responsible for mileage over the contracted amount and any abnormal wear-and-tear. It is important to note, however, that although the customer has the ability to work with the lessor to set the specific mileage for the lease, once the mileage is chosen it becomes part of the contractual agreement. Because of the lack of residual responsibility by the customer, this lease type is also known as a "walk-away" lease.

One of the main factors a business owner should consider when deciding which kind of lease to select is how the business's vehicles will be used. An open-end lease gives businesses complete flexibility in determining depreciation rates, matching the vehicle's use with its wear-and-tear, mileage and useful life. Accurately considering these factors will ensure that the business will not owe money at the end of the lease. Since in an open-end lease a business will not incur any over mileage charges, companies with employees who do a lot of driving will probably get more benefit from this type of lease, particularly if employees keep their vehicles well-maintained.

Increase Cash Flow with Fleet Lease versus Fleet Purchase

A major consideration is to fund vehicles through a full-service fleet management company. This can make it possible for the business to establish a separate line of credit and avoid tapping lines of credit at a bank to fund rapidly depreciating assets, (i.e., a fleet of 15-125 vehicles). Additionally, while most leases do not require a complete payback of the principal balance of the vehicle, traditional forms of financing or outright purchase generally require a complete payback of principal. As such, leasing can free up cash that the business can use to invest in equipment or personnel to increase revenues.

Not only will the monthly payments be lower with lease funding, but by working with fleet management experts to set proper residual values to avoid losses at the end of the lease, the business also can substantially improve its cash flow over the life of the vehicle. The bottom-line, for any company, is how the amount of money that can be saved each month from leasing can have a considerable impact on the business.