Developing and Controlling a Fleet Budget

Fleet managers are tasked with numerous responsibilities that cover a broad range of areas. With costs in many of these areas growing and a fleet manager’s value often measured by how well they control or reduce costs, knowing how to develop and control a budget is key for both a fleet manager’s success and a well-run, efficient fleet.

A Sound Budget Is a Fleet Managers Best Friend

When thoughtfully developed and implemented, a fleet budget can have a significant financial impact on overall fleet operations. It can help fleet managers plan for expenses, manage assets and funds more effectively, analyze expenditures and identify areas for improvement — all of which can help control and reduce costs and boost the all-important bottom line.

While developing a budget is probably not at the top of the list of the most popular responsibilities for fleet managers, there’s no doubt it’s one of the most important and is not as difficult as you might think. It doesn’t require an accounting degree or expertise in money management. Following a step-by-step plan will get the job done.

Here’s a quick overview.

Step 1: Set Objectives and Strategy for the Year

List the top objectives you hope to achieve during the time frame for which you are budgeting, figure out how you plan on achieving your objectives and make sure they are in line with the overall strategies of your company: For example:

• Decrease fuel usage by 2%
• Maximize vehicle resale value
• Improve productivity by 5%
• Cut administrative costs by 15%

Step 2: Determine Cost Assumptions

Effectively developing your budget means recognizing there are internal and external factors that can impact your budget over which you may not have control. . To that end you need to:

• Look at the factors that influenced the previous year’s budget
• Consider what present factors could impact the budget you’re developing
• Anticipate what future factors may affect your budget

Prior to determining the line item dollar amounts in your budget, make sure to document, in writing, cost assumptions and the factors that may cause expenses to increase or decrease and why you feel they may increase or decrease. Having documentation on how your costs were derived, helps build a case for your budget and gives you effective means to defend it.

Step 3: Determining Line-Item Costs

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

• Fuel
• Vehicle Depreciation
• Maintenance
• License/Taxes
• Disposal Adjustment
• Interest Expense
• Leasing and Fleet Management Fees (if the fleet is leased or managed by a third party)
• Personal Use Chargebacks
• Insurance and Accident Expenses
• Safety Programs

Let’s take a closer look at two of these.

• Forecasting Fuel Expense
  With the price of fuel constantly fluctuating, fuel is one of the most difficult line items to forecast. Looking at historical fuel price data to determine the cost of fuel is the first step. Next is determining the actual miles per gallon attained by your vehicles and third is determining the average turn-in mileage for your vehicles.
  
  By knowing the projected fuel cost, average miles per gallon and the number of miles your fleet travels per year, it’s then simple math to fill in the fuel line item of your budget.

• Calculating Vehicle Depreciation
  In determining your fleet’s depreciation value, the number of months you want to write-off vehicle acquisition costs  is key to budget planning and varies depending on the accounting practices of a company.
  
  For fleets that own their vehicles, the average depreciation period is 36 months. Since cash is expended at vehicle acquisition, the company attempts to write-off the cost of the asset as soon as they can. A faster write-off can increase a company’s profits by lowering the taxes to be paid during the write-off period. For leased fleets, a company typically wants a longer write-off period for lower monthly payments.
  
  Vehicle depreciation cannot be determined without first determining the capitalized cost of the fleet, which is the total dollar amount that fleet vehicles are going to cost at acquisition.
  
  To determine depreciation, simply multiply the total capitalized cost by your depreciation factor, which is typically two percent per month. For yearly depreciation, multiply the two percent monthly depreciation by 12 months.

Step 4: Monitoring, Modifying and Controlling Your Budget

Since budgets are always fluctuating, modifying your budget periodically is necessary.

The best way to do this is to take your projected costs for each line item (spreadsheet format preferably) and compare them line-by-line with the actual costs in each line item category. The difference between the two numbers is the variance. You’ll need to establish limits for the variance and then try to stay within them. If not, you may find it necessary to reduce the actual costs for other line item categories.

Track all variances closely and keep detailed records. This information will prove helpful in predicting variances for future budgets. There is no specific time frame to review and modify your budget.. Each fleet is different. Some do it monthly, others quarterly or yearly. But one thing is common among fleets, monitoring your budget will allow you to fine-tune it and hopefully improve it year after year.

And a fine-tuned, sound and effective budget is good for business and for fleet managers.

Want to learn about an effective strategy for controling fuel costs? Check out our Fuel Hedging 101 guide.