The foundation of any well-run fleet is its budget, and developing and maintaining that budget is a key aspect of the fleet manager’s job. Although it’s important, doing the budget is probably not something most fleet managers look forward to. By following a simple, step-by-step plan, you can minimize your headaches and maximize the all-important bottom line.
Determine the Type of Budget and Cost Assumptions
When planning your fleet budget, the first thing to consider is whether your budget is used as a planning tool for the allocation of funding, or it is used as a means of profit and loss asset management in a functional area. Municipal fleets generally fall into the first category, while commercial fleets most often use the latter method.
The purpose of the budget will determine the level of detail required in the determination of the line item expenses. If the budget is just used as a planning tool, then it becomes more of a macro-analysis situation, meaning that you can determine line item costs based on broad-based averages. This is generally sufficient if you’re using the budget primarily as a planning tool, either on a nationwide basis or a division-wide basis, to determine if expenses are running close to expectation on a big-picture scale.
For David Carr, manager, motor pool operations, University of Washington, the fleet budget is used primarily as a planning tool.
"We basically spend what we have to on operations and create a rate that recovers that money in the next period," Carr said. "We submit a written request for what we think we’ll spend, and the central administration funds all or part of it depending on how much they have available."
If the budget is used as a tool for asset management, it becomes necessary to micro-analyze it, closely scrutinizing each line item cost to maximize efficiency.
Jerry Albertini, manager, corporate services, Simplex Time Recorder Co., prepares his company’s fleet budget in this more detail-oriented way.
"In some companies, the budget is merely a planning tool that is submitted to attain funding levels," Albertini said.
"In others, it is a forecasting and month-to-month operating tool to measure performance and contribution. Within Simplex, the objective is to improve asset value and better manage expenses, so each line item expense is looked at with scrutiny each month."
Once you’ve decided whether to take the micro- or macro-economic approach, the next step is to determine your cost assumptions. When developing a budget, it’s important to assess internal and external forces that may affect the budget. Start by determining what factors influenced the previous year’s budget, as well as what current factors may impact the budget you are currently working on.
One way to include these factors is to place them into a preliminary budget forecast. Windell Mitchell, fleet manager for King County, WA, uses this method.
"When we prepare our annual budget, the first step is for the budget office to do an economic forecast in terms of what the inflationary index will be for the upcoming fiscal year," Mitchell said. "This inflationary index is broken down into labor costs, utility costs, fuel costs, etc. Then we examine these costs indexes, one at a time, to determine how these factors are going to affect our budget for the upcoming year."
The more accuracy you can build into these initial cost predictions, the less room for error there will be in your final budget, so it’s worthwhile to invest extra time at the outset of planning your budget to establish your possible cost factors in detail.
Next, find out what future developments may affect the upcoming budget. At this point, it’s a good idea to document in writing your cost assumptions as to what factors may cause fleet expenses to change prior to determining the line item dollar amounts in your budget requests. Documenting assumptions about how costs were derived provides the fleet manager with an effective means to defend his or her budget request.
Analyze Previous and Current Budget
Once you’ve decided the type of budget you need and documented your cost assumptions, the next step is to analyze previous budgets, as well as the budget for the current year. By doing this, you can determine projected line item costs for the future, as well as determining trends in expense fluctuation over various periods of time.
Fleet managers vary widely in the scope of the time periods they analyze, but it’s generally one to three years. A good place to start is the previous fiscal year, which will give a good approximation of costs for the year to come. In order to track trends, it will be necessary to track at least the previous two years.
"As far as my operating budget, what I do is compare the last two years," said Celena Stone, fleet manager, City of Huntsville, AL. "If I have increased in certain areas, then I take into consideration that I would need to increase by that percentage in the coming year."
To determine long-term trends, it is helpful to analyze your fleet budget over a period of several years.
"When we plan our vehicle acquisition budget, we use a five-year forecast, so we know where we’re headed at all times," said Thomas Larkum, fleet operations manager for the city of West Hartford, CT.
Some fleet managers rely on the current fiscal year to develop their projected budget for the coming year.
"Our planning process for the next fiscal year starts in September," Albertini said. "The first thing we do is take a current snapshot of actual-to-plan performance year to date through August and do an 8-4 forecast for the balance of the current year," said Albertini. "Then utilizing actual performance, cost trends, market data, and program improvements, the macro budget is prepared for the follwoing year. At the same time, three-year projections are made given internal plans and growth forecasts."
Another common method is to use the previous fiscal year as the basis for the current year’s rate determinations.
"We establish our budget every year based on last year’s budget information," said Jan Faries, fleet operations manager for R.J. Reynolds. "Then, throughout the year, we manage that budget and adjust programs to control the impact that it’s going to make on us."
Eric Rickard, fleet manager for Crossmark Corp., also uses the previous-year method. "We use the previous year as a benchmark," Rickard said. "Then we establish whether there will be an increase in the budget, whether we can keep it at the current rate, or whether we can find areas where we can save money and lower the budget."
Whatever time period you choose, the idea is the same: analyze the budget item by item, looking for patterns in usage and expense.
Develop a Working Budget for the Next Fiscal Year
Once you have thoroughly analyzed the previous and/or current budget, the next step is to develop a working budget for the coming fiscal year. This is done several months to one year in advance, commonly in the fourth quarter of the fiscal year.
There are several methods for arriving at a projected method. The most simple is to take the previous budget and multiply by a fixed increase rate, such as 3 or 4 percent, to account for inflation. While this method might work for a small fleet whose personnel and vehicle profile are relatively static, it will probably not be accurate enough for most fleets, which experience constant fluctuation in cost, staffing, and vehicle makeup.
To paint a more accurate picture of your fleet’s actual operating budget, you will need to factor in your company’s cost assumptions, as well as any historical data you have found from your year-to-year comparisons. You will also need to take into account any projected growth your company may face.
"When we plan the vehicle acquisition portion of our budget, we account for personnel changes," said Jan Preble, fleet administrator for Intel Corp.
"The first step for us is determining how many replacement vehicles we’re going to need. That makes a big difference in our overall budget."
If your company has a computer system that tracks the usage of vehicles (including mileage driven), such a program can project, based upon your replacement criteria, which vehicles will come up for replacement in the coming budget year.
Quantifying Line Item Costs
At this point in your budget development, you should focus on quantifying the line item costs within your budget. Line item costs are the specific cost factors that comprise your budget.
These line item costs will vary from company to company. The most common line item costs in a fleet budget are:
- Disposal Adjustment.
- Leasing/Fleet Management Fees.
- Insurance/Accident Expenses.
- Personal Use Chargebacks.
- Vehicle Depreciation.
- Interest Expense.
- Safety Programs.
Of all the line item expenses, this is the most difficult to forecast accurately, because of frequent price fluctuations.
When planning your fuel budget, it’s helpful to analyze historical fuel price data, such as that provided by Runzheimer, the National Association of Fleet Administrators (NAFA), or the fuel price index that runs in Automotive Fleet monthly. Because of the frequent fluctuation in fuel prices, it’s a good idea to allow some extra variance in this department. One way to do this is by calculating the change in fuel prices over the course of the previous fiscal year and using that percentage as your fuel line item variance.
Although you cannot control fuel prices, there are some ways to control overall fuel spending.
"We examine how many people buy from name-brand stations and how many buy from second- and third-tier stations," said Albertini. "That can save 5 to 6 cents per gallon. We’re trying to shift buying patterns, getting people to buy the less expensive gasoline. We can control the rising cost of fuel by shifting the buying patterns. We’re looking at a program to incentivize people to do that."
Another way to minimize your fuel budget is by tracking the miles per gallon for all your vehicles. If fuel prices are rising dramatically before a planned replacement cycle, you might consider replacing less-energy-efficient trucks and SUVs with more economical sedans or wagons.
This line item is also difficult to forecast due to frequent changes in used-vehicle market conditions. The simplest way to calculate this figure is to apply the previous year’s depreciation rates to the capitalized cost of your fleet.
"The most difficult area of a budget to project is the resale value of the vehicles you will be turning over," said Ron Sarno, fleet manager for Pfizer Inc. "To maximize your budget, you really need to pay special attention to all details of the remarketing process, particularly the timing of your resales," Sarno added.
Determining the depreciation factor for your fleet is a crucial step in preparing your budget. The point is to calculate the number of months it will take to write off your vehicle acquisition costs. This period varies from company to company. For fleets that own their vehicles, 36 months is the average period. The shorter the period, the higher the company’s profits, since taxes for this period will decrease. For leased fleets, a longer write-off period is preferable, since it will help lower payments.
"We charge depreciation to the operating budgets of each department, so it’s separate from our capital asset plan, which accounts for our acquisitions," said Debbie Mize, fleet manager for Hallmark. "This makes it easier to manage our depreciation, which we track on a month-by-month basis."
"The key to controlling depreciation is to consistently use lifecycle cost analysis," said Patsy Brownson, fleet manager for Cox Enterprises Inc. "You have to do a true, birth-to-death lifecycle cost analysis to determine your actual cost."
Monitoring and Controlling Your Budget
Once you have developed your projected budget, the final step is to monitor and control that budget. Since all budgets are in a constant state of flux, it will be necessary to modify your budget throughout the year to account for fluctuations within different areas of your budget.
To do this, take all of your projected costs for each line item, in a spreadsheet format, and compare the line by line with the actual costs in each line item category. The difference between these two numbers is called a variance. You should establish acceptable limits for these variance and try to stay within the established limits. If you go outside of the limits, it may be necessary to compensate by reducing the actual costs for other line item categories. It’s important to track all variances closely and keep a detailed record of them, since this information can be used to predict variance in future budgets.
"The way we can consistently come out under budget is by looking at the budget line item by line item," Albertini said. "We plan, budget, and forecast line item by line item. We’re looking at each expense variation each month. When I see a variance (positive or negative) from plan, I assess the causal factors and try to maximize or minimize the impact on a line by line basis." Each fleet monitors its budget at different intervals. Some fleets choose to monitor their fleet budget monthly, as vehicle usage and expense reports come in.
"I review the budget monthly," said Susan Miller, senior manager, domestic fleet, for McDonald’s Corp. "This way, I can make sure it’s staying on track with what has been budgeted for that year. A lot of it is just being familiar with your data and historical trends."
Other fleets may review their budget performance on a quarterly or yearly basis. The more often you compare your actual budget to your projected budget, the easier it is to correct for any variances that may occur.
"We monitor our budget monthly," said Mize. "You need to check your costs as often as possible to account for the changes that can happen month to month. Once you get your annual budget you should calendarize monthly."
Although they may share some common traits, all fleet budgets are different, and each will require a unique strategy to develop and control it. By closely monitoring your budget’s performance, you’ll be able to fine tune it, and hopefully, improve it each year.