This two-part Blog Series will explore strategies that procurement and fleet professionals can leverage to decrease operating costs and increase short to mid-term cash flow. These two outcomes are critical to financial health and longevity during times of economic downturn, especially with the scope and size of the impending downturn stemming from the COVID 19 pandemic. Strategies that will be covered in this series create cost savings that will enable your organization to allocate critical dollars to the areas where it is most needed (e.g. keeping employees on the payroll while new sales come to a halt). There are 5 primary strategies that will be explored:
• Restructuring your lease strategy for new vehicle acquisition
• Leveraging sale and leaseback programs
• Fleet policy restructuring
• Fuel economy optimization
• Maintenance optimization
Optimizing your asset acquisition strategy is a great way to lock in short term cost savings. Right away, from a cash flow prospective, leasing fleet vehicles versus purchasing outright will result in immediate short-term savings for any planned new purchases. In times where cash is tight, leasing is the way to go. When looking at lease options, the most common vehicle leases are structured as a capital lease or operational lease. A capital lease has a higher monthly payment, but at the end of the lease term ownership transfers to the lessee. Conversely, an operational lease has a lower monthly payment, and at the end of the lease term the ownership of the asset transfers to the lessor.
There upsides and downsides to each lease structure. For example, a capital lease allows you to recognize expenses sooner and the Lessee can claim both interest and depreciation each year on the assets, thereby reducing taxable income. You also own the assets after the initial capital lease term, so you don’t have recurring monthly payments on each asset once the lease term expires. However, the recurring monthly payments on your new vehicles are higher on a capital lease. A company-wide capital lease strategy also yields higher year over year maintenance costs since you will tend to cycle assets for a longer term, on average, since all/most of your assets are owned and you incurred a higher up front cost. Whereas vehicles under an operational lease umbrella will generally be newer which results in less breakdowns and required maintenance over the long term since vehicles will be cycled in tandem with the operational lease term (typically 3-5 years).
When you think of this dynamic between both lease structures during a time of a recession or company hardship where short-term cash flow is paramount, it is advantageous to shift your buying strategy of new vehicles towards operational leases. This lease strategy will give the organization some short-term relief in the form of lower monthly lease payments (if buying new assets is still a must), and, over time, will reduce year over year maintenance costs as the average age of your fleet trends lower. If this strategy is conducted in tandem with selling off old assets carrying high year over year maintenance costs, the Net benefit can be game changing – more to come in Part 2 of this Blog Series on maintenance cost savings.
Executing a Sale/Leaseback program is another way to quickly inject cash in your organization. A sale and leaseback program entails selling your assets for cash and subsequently leasing back those same vehicles under an adjusted lease structure. Selling your vehicles at fair market value will help to inject some cash in pocket immediately and can also help to streamline or consolidate leases if multiple exist; a commonality if your organization has been involved in any M&A activity and inherited a detached fleet.
Overall, your long term acquisition strategy needs to be carefully examined based on the unique characteristics of your fleet. The type of fleet (heavy/semi-trucks vs. passenger vehicle), use of fleet (long haul vs. short haul), geographic location (desert vs. mountains), idle times and so many other factors need to be taken into consideration when choosing the right acquisition and maintenance strategy. However, in the times we are in today there are a handful of best practices that can be taken in the short-term to reduce operational costs and increase cash flow. Part 2 of this series will dive into more detail on how fleet policy restructuring, fuel optimization and maintenance optimization can achieve similar short-term results to the outcomes described herein.