Research shows that over 80% of businesses and customers do not truly understand the whole life cost of their vehicles, and the financial impact of making the wrong decision can be significant. For this reason it is important that businesses take time to really understand this subject before committing to a vehicle acquisition strategy.
When I speak to business owners and fleet managers about how they source their vehicles, the majority of them will tell me what it costs upfront or as a monthly payment to buy or acquire a vehicle. This prompts me to delve a bit deeper. After a little more probing, the reality dawns that the whole life cost of owning and operating this vehicle is much more than originally thought. There are a lot of factors that contribute to a vehicle’s lifetime cost, not just the upfront fee or monthly payments. Nor is it simply the initial vehicle price minus depreciation, although depreciation is a key factor – see Tim’s blog post for more information.
So, what is the whole life cost of a vehicle?
Initial and monthly payments are just the tip of the iceberg. Businesses may want to consider the following when trying to ascertain the whole life cost of their fleet:
Servicing, maintenance and repair (SMR) – as the vehicle ages, the manufacturer warranty expires, meaning you could be landed with hefty maintenance and repair bills if anything goes wrong. This is also often not included in a vehicle leasing arrangement. Have you ever considered what your annual SMR bills mount up to?
Road fund licence – one of the benefits of running a younger fleet is that Road Fund Licence or vehicle tax are likely to be a lot lower than if you were operating older commercial vehicles. Check what you’re paying with your current vehicle(s) by using this handy calculator on the gov.uk website
Breakdown cover – what are you paying annually for your breakdown cover? Is it the most competitively priced on the market? Is it reliable or limiting? This is an additional cost to consider, not to mention the cost of replacement vehicles during periods of downtime. Depending on your chosen vehicle acquisition method this can sometimes be wrapped up in the package
Finance deposit – this is a one off payment but don’t forget to include it in your calculations
Advanced rental payment – what does it actually mean? This isn’t as transparent as it first appears. The +1 can sometimes actually be as much as nine months’ worth of payments in advance of a 36 month payment term. Not quite what you were expecting?
Interest – you’ll be paying more for the benefit of monthly repayments. What interest are you paying and what does your balance sheet look like at the end of the contract term?
Monthly payments – it may be easy to calculate what your outgoings are for the next two to three years, but how does this impact your total vehicle whole life cost? If your monthly payments are for contract hire, it’s worth checking that there are no hidden payments or penalties for returning the vehicle before the end of the contract
Fuel costs – are you monitoring your fuel costs? Could the way you acquire your vehicles impact on annual fuel spend? Choosing a method where your vehicles are frequently updated with a younger, more fuel efficient fleet could be a big tick in the box
Unnecessary extras – consider what you really need in and on your van. In one instance I worked with a business that was spending a significant amount of capital on a high specification van, even paying extra for alloy wheels. On reflection, the customer realised that they simply needed a vehicle to get them from A to B, and this cost was quickly eliminated
Depreciation – lastly, the one aspect that many businesses are familiar with. We all know that vehicles depreciate in value but I wonder how many businesses realise that there is a vehicle acquisition method that actually shields businesses from this monster? For more information on this, head over to Tim’s blog on vehicle depreciation
Finally, and what is arguably one of the most costly factors when running an ageing fleet, businesses need to consider downtime. According to research by Autoglass published in Fleet World, the average cost attributed to vehicle downtime is estimated at around £727 per day in terms of lost revenue. In my experience, businesses often overlook the financial impact of the time their vehicles are off the road. What long-term damage could failing to reach your customers do to your business?
Considering all this, could you be saving money? If you’re a business looking to make cost savings, then understanding your vehicle whole life costs could be a great starting point. You may be surprised by what you find. Speak to an advisor to gain expert understanding of what is and isn’t working for your business in relation to your vans and work with them to find the best solution to your business needs.