Fleet Management Tips: Developing and Controlling a Fleet Budget

Fleet Management Tips: Developing and Controlling a Fleet Budget
Posted by PS Energy Group on

A fleet manager’s effectiveness is often measured by their ability to control and reduce costs. That’s why developing and controlling a well-structured budget is essential — not only for running an efficient fleet, but also for ensuring long-term success as a fleet manager.

When thoughtfully developed and monitored, a fleet budget can have a significant impact across all areas of fleet management and operations. The benefits of a fleet budget extend beyond tracking expenses. It shapes how smoothly operations run, keeping costs under control while ensuring safety, reliability, and efficiency. 

A Sound Budget Is a Fleet Manager’s Secret Weapon

Developing a budget may not be a fleet manager’s favorite task, but it’s one of the most important. And it’s probably not as challenging as you think. You don’t need a degree in accounting or deep knowledge of corporate finance.

Creating a sound budget is more about gathering accurate data, tracking expenses, and planning for future needs than it is about crunching numbers. What you do need is a solid understanding of your fleet’s operations, costs, and goals.

By following a clear, step-by-step budget development process, you’ll gain valuable insights into your fleet operations and have the necessary information to create a budget that keeps your fleet running smoothly, efficiently, and profitably.  

Let’s look at the steps to follow. 

Step 1: Set Objectives and Determine Strategies for the Year

When developing your fleet budget, start by setting clear objectives and strategies for the year. These should align with the overall goals of your organization. For example:

  • Decrease fuel usage by 2%
  • Improve vehicle utilization by 30%
  • Cut administrative costs by 15%
  • Improve productivity by 10%

Once objectives are set, outline the strategies to achieve them — such as reducing idling, scheduling preventive maintenance more effectively, using telematics to optimize routes, or conducting a fleet utilization audit.  You’ll also want to associate metrics with these objectives to ensure you stay on track. Read our blog on fleet management KPIs you’ll want to track. 

Step 2: Determine Cost Assumptions

Cost assumptions are the baseline estimates you make about future costs and conditions that drive your expense forecasts. They provide the framework for calculating line-item costs.

To develop accurate cost assumptions, you need to recognize that both internal and external factors — many beyond your control — can impact your budget. To account for these:

  • Review the factors that influenced the previous year’s budget
  • Consider current factors that could affect the budget you’re developing
  • Anticipate future factors that may affect your new budget

If you’ve been tracking fleet management KPIs, you’ll also want to include this in your analysis, as historical data can help you identify areas that impact costs. For example, tracking maintenance costs can show whether you’ll need to replace your vehicles or equipment.

Next, document your cost assumptions, the factors you expect to cause increases or decreases, and your reasoning. This builds a solid case for your budget and is an effective way to defend it.

Step 3: Determine Line-Item Costs

Your cost assumptions translate into line-item costs — the actual dollar amounts you allocate. For example:

Maintenance & Repairs Cost Assumption: $1,200 per vehicle per year (120 vehicles)

Line-Item Cost: 120 x $1,200 = $144,000

Line-item costs vary by fleet, but typically the most common included in a budget are:

  • Fuel
  • Maintenance and Repairs
  • Insurance and Liability
  • Licensing, Registration, and Taxes
  • Tolls, Parking, and Permits
  • Vehicle Acquisition/Replacement/Depreciation
  • Loan/Lease Interest
  • Driver Wages and Benefits
  • Training and Certifications
  • Telematics and Fleet Management Software
  • Communication Equipment
  • Safety Equipment and Compliance

Let’s take a closer look at two of these line-item costs and the process involved in determining them.

Fuel

Because fuel prices fluctuate due to external factors, fuel is one of the most challenging items to forecast accurately. The first step is to review historical fuel price data. Then determine your vehicles’ average MPG and their average turn-in mileage.

With projected fuel costs, average MPG, and annual fleet mileage, you can calculate the fuel line item with simple math. To get fuel costs under control, you may want to consider diesel hedging and swapping. However, you’ll want to ensure that you fully understand the pros and cons of this approach — we go into more detail here.

Vehicle Depreciation

To calculate fleet depreciation, first decide how many months you’ll write off vehicle costs — this depends on your accounting practices.

  • Owned vehicles: Typically depreciate over 36 months. Writing off costs quickly can reduce taxes and increase profits.
  • Leased vehicles: Usually spread over a longer period to lower monthly payments.

To calculate depreciation:

  • Determine the fleet’s total cost (capitalized cost)
  • Multiply by the depreciation rate (usually 2% per month)
  • For annual depreciation, multiply the monthly rate by 12

Step 4: Monitoring, Modifying, and Controlling Your Budget

Since budgets are based on estimates and assumptions, and costs such as fuel, maintenance, and vehicle usage fluctuate, budgets should be reviewed and modified throughout the year. This is where your fleet management KPIs come in handy.

With this data, the best way to review and modify your fleet budget is to compare projected costs for each line item with the actual costs. The difference is called the variance. You’ll need to establish variance limits and stay within them. If a line item exceeds its limits, you may need to offset the excess by reducing costs elsewhere.  

Track variances closely and keep detailed records. This will improve accuracy and make it easier to predict future variances.

Turning Effort Into Excellence

The effort put forth in developing and controlling your fleet budget is well worth the payoff. Not only will you be better able to keep costs under control, but positioning your fleet for safety, efficiency, reliability, and profitability over the long term is also easier.

Want more insights? Read our latest post on five smart strategies to achieve significant fleet management cost savings.