by Laura Walter
February 2, 2006

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.

Cycling Extends Cost Savings

While saving money through the acquisition of vehicles is a key way to cut costs, business owners also need to consider long-term decisions such as how to save money on the back end of a vehicle's life cycle. The goal is to minimize the net depreciation of the vehicle, which is accomplished by managing the lifecycle of vehicles. In fact, money saved on the vehicle disposal process can have an equal or greater effect on a company's bottom-line. Business owners need to carefully consider not only when to sell vehicles, but also the best methods to do so, and this area of business decision-making is another area in which outsourcing to a fleet management expert can save time and money.

How and when a company decides to sell its vehicles depends on many variables, including factors such as time of year, mileage, vehicle type, age and maintenance history. A good way for a business owner to determine how and when to sell a business' vehicles is by performing a vehicle analysis that looks at the entire fleet and how the company uses its vehicles. From that analysis, the strongest time of the year to re-market or cycle vehicles can be determined.

Many fleet services companies have vehicle replacement cycling systems that ensure vehicles are replaced at appropriate intervals to achieve optimum performance and the best resale value, and remarketing professionals who can help business owners take the guesswork out of this process. These programs consider everything from future trends and the current used car sales market, to vehicle warranties, mileage and the possible wear-and-tear that a business will inflict on a vehicle.

No matter which method of funding vehicles a company chooses, there are many other benefits of fleet management, including saving time, decreasing management responsibilities and making it easier to monitor fleet operation. An effective fleet management program provides a comprehensive approach to saving money on everything from acquiring vehicles to replacing them at appropriate intervals. It also can help companies obtain funding and other ancillary services that range from obtaining vehicles at highly competitive prices to receiving the maximum discounts, rebates and incentives available.

Following are three examples of companies that have implemented cycling programs to achieve certain business objectives:

  •     Cycling Vehicles Generates Cost Savings-DynaTen, a mechanical contracting and service company with about eighty-five vehicles in its fleet, has had a cycling program with Enterprise Fleet Services for nearly four years. The program ensures vehicles are always in the best possible condition and replaced at appropriate intervals to achieve optimum performance and the best resale value, which has a positive impact on cost savings. In addition, having newer, well-maintained vehicles generally means better fuel efficiency, an issue that has become a serious bottom-line consideration for DynaTen because of the surge in gasoline and diesel fuel prices.

"We order between eight to ten new vehicles every six months and shift around other vehicles to ensure maximum usage," said Mark Nyquist, CEO of DynaTen. He added that Enterprise's buying power with manufacturers and strong                                             commitment to delivering excellent customer service through local offices staffed by experienced professionals is a significant advantage.

"Planning ahead benefits us on everything from taking advantage of being able to negotiate the best price to knowing when to acquire and dispose of vehicles," said Nyquist. "The bottom line is that cycling is an important component in helping companies with mid-size fleets like ours to achieve strategic business objectives."

  •     Keeping Vehicles Improves Return on Investment-For Powers Products, Inc., based in Denver, advance planning is particularly important when it comes to getting the best return on investment on the company fleet. Powers Products, Inc. is a sixty-year-old subcontractor serving the commercial construction market in Colorado and Wyoming, including masonry contractors, general contractors, architects and building owners.With a fleet of thirty-eight vehicles, comprised mostly of three-quarter ton pick-ups, the company began cycling vehicles about three years ago to get better control of lease rates, improve vehicle reliability and lessen the amount of time spent internally on fleet management.  "When we owned our vehicles, we 'drove them into the ground.' The extreme mileage led to high maintenance costs and vehicle downtime," said Steve Huck, fleet manager for Powers. "It also took a lot of administrative time to manage all the details.So as our company grew, it became more economically feasible to negotiate lease rates with one company and ensure the reliability of all vehicles by replacing them at appropriate intervals to achieve optimum performance and the best resale value," said Huck.

    The cycling program not only helps ensure Powers' employees are driving vehicles equipped with the latest equipment and safety features, but it also promotes the company's professional image when customers see modern, well-maintained vehicles. "No one wants to see you show up at a jobsite in a run-down truck," Huck said.
    He added that in the construction industry, "where the schedule waits for no one," vehicle reliability is critical.That's why for Powers Products' cycling program, planning ahead also means trying to predict business trends in the construction industry."We can save a lot of money by ordering new vehicles direct from the factory, but the longer lead time required for ordering, about eight to ten weeks, requires the ability to anticipate our business needs," said Huck. "Fortunately, we've been able to do this successfully."

  •     Optimum Performance and Best Resale Value-Another company, Estes Heating and Air Conditioning, has trucks on-call by radio during regular service hours and is available around the clock for emergencies. With a motto stating, "We'll be there when you need us," the company assures its customers they will receive quality, dependable service, often the same day.

"Our total commitment to customer service and satisfaction demands we maintain a fleet of reliable, fully stocked service vehicles," said Brian Estes, vice president. "With sixty service vans in our fleet, having a cycling program ensures our vehicles are always in the best possible condition. In addition, having newer vehicles helps promote the company's professional image and improves employee satisfaction when they can drive newer, well-maintained vehicles."

He explained that before instituting a coordinated cycling strategy two years ago the company drove a vehicle until it was ready to fall apart, then stripped and detailed it before trying to sell it themselves. "In addition to investing a lot of energy and resources on older vehicles that were not in very good shape by the time we were finished with them, we were spending valuable time trying to be 'used car salesmen,' which is not our area of expertise," said Estes.

Estes' cycling program also has generated cost savings. "Replacing vehicles on a regular basis has noticeably lowered our maintenance costs. In addition, pre-planning enables us to take advantage of ordering vehicles from the manufacturer so we get a better price," said Estes. He added that if the company needs a vehicle in a hurry from out-of-stock inventory, the fleet management company makes sure it is delivered with the specified bin package and tool boxes.

The bottom line is that planning ahead when it comes to both the makeup of a company's fleet and knowing when to acquire and dispose of vehicles is an important component in helping companies with small- to mid-size fleets achieve strategic business objectives.

Every Vehicle Is a Rolling Billboard

In today's market-driven society, every vehicle in a company's fleet is a rolling billboard.  How a company's vans and trucks look and drive on the street is an integral part of the company's brand identity. And in a highly competitive marketplace, branding not only is effective in "pre-selling" a company's product or service to customers, it can also differentiate a  company from its competitors.

The way a business directs and controls its brand is important, both externally and internally. Visually, a company's brand identity is communicated in a variety of ways, from having the right name and a great logo displayed on a fleet of vehicles to being represented by well-trained and well-groomed employees.

But branding also can be viewed from the standpoint of reducing costs and increasing productivity. In addition to influencing prospective and current customers, a company's brand identity can also impact recruitment, retention and overall productivity of its employees.

For example, having a fleet of newer, well-maintained vehicles not only looks better, it also can actually help a company achieve the optimum return on its investment in terms of avoiding frequent breakdowns and lost revenue due to missed appointments while vehicles are out of service.

At the same time, having a clean, well-maintained fleet can also help improve driver satisfaction and safety, which can translate to fewer accidents and injuries, less downtime, reduced absences and fewer workers' compensation claims.

A basic business practice in consumer and packaged goods industries for decades, brand management is now being embraced by companies across all industries. But what is branding, really?

Essentially, it is a consistent focus on the image, value and positioning of a business and the goal is to manage these variables to maximize both sales and profitability.

For example, despite the temptation to hold onto older vehicles, the fact is that keeping older vehicles can be counter-productive to the company's image. Whether the vehicle is being driven through traffic or parked in a customer's driveway or jobsite, a vehicle that shows a lot of wear-and-tear can present a negative image in terms of the company's financial resources, pride in workmanship or attention-to-detail. Ultimately, projecting a poor image can influence current and prospective customers to choose a competitor.

Branding also can be communicated to customers through employees. And one of the best ways to instill brand values is by using the one resource that employees use on a daily basis-the company's vehicles. Vehicles that operate efficiently, have the latest technology and safety features and are clean and well-maintained, set a higher standard for job performance by letting employees know that the company wants them to have a positive attitude and cares about their well-being. Not only does driver morale enhance driver safety, instilling pride and enhancing job satisfaction also helps more effectively translate the company's brand promise to customers through its employees.

Last, but not least, branding is communicated in many ways, but the most effective can be through word-of-mouth by customers, suppliers, business partners and employees. So, the company's fleet can be one of the most effective vehicles for presenting the business' professional image.

Construction Business Owner, February 2006