Regardless of how many variables there are for determining a fleet's success, the final determinant is always money. And the cardinal rule for making profits is properly managing the money at your disposal.
A fleet budget is the ideal measurement of well-run operations. As such, creating and maintaining a budget is a vital aspect of fleet management. The success of a fleet is usually determined based on how well costs can be lowered or controlled. A budget, when created well, can help a fleet set its financial goals and identify areas that require improvement.
Setting up a fleet budget isn't always the easiest of tasks. Even so, you still have to create it. In this post, we'll guide you through all you need to know about fleet management budgets, including how to create a functional and flawless one.
What are Fleet Costs?
Also known as total ownership costs (TCO), fleet costs are different costs associated with purchasing and maintaining fleet vehicles. Fleet managers often overlook TCO when purchasing vehicles— a costly mistake that could result in overspending.
There are two types of TCO expenses, namely:
Fixed costs: These include taxes, vehicle purchase, insurance, vehicle lease or loan payment, depreciation, registration, etc.
Variable costs: These comprise fluctuating monthly expenses such as fuel expenses, maintenance, parking tolls, replacement of parts, etc.
To calculate TCO costs correctly, you need to factor in:
- The cost of each vehicle in your fleet, including interest and taxes
- The return value of your fleet vehicles should you decide to sell or scrap them
- Fleet maintenance and repair costs accrued over the vehicle's lifespan.
How Fleet Management Cuts Cost
Fleet management can cut costs by monitoring and assessing the vehicle and driver performance. By optimizing fleet performance using telematics, you're likely to realize a significant financial impact on your fleet.
To effectively cut costs, you can tailor your fleet management approach to focus on cost-cutting strategies such as:
- Minimizing risks to save money on insurance
- Assessing business costs
- Creating maintenance schedules
- Monitoring fuel consumption and idling time
By tracking current fleet patterns, you can identify solid indicators of future expenses and make changes to your fleet management strategy to cut unnecessary costs. Additionally, you can monitor any unexpected activities and target problem areas to improve efficiency.
How to Create a Fleet Management Budget
Here's a four-step process to help you create a fleet management budget:
Set Goals
A sound budget aligns properly with your company's goals. With that in mind, you'll need to set specific objectives for your fleet and align them with your budget.
SWOT analysis is an excellent technique for determining your goals. It helps you identify your company's strengths, weaknesses, and opportunities. For instance, your strength could be adaptability, but your weakness is increased idle time. This could result in you implementing a strategy that minimizes idling time, consequently reducing fuel costs for the next period.
An opportunity could also arise to incorporate electric vehicles into your fleet to gain a competitive edge. Incorporating electric vehicles can also ensure that you align with the global sustainability goals.
In the long run, your objective should be to develop a plan for your company that factors in potential future changes. The goals will serve as the building blocks for the budget.
Review Previous Year Expenses
The next step is to review the past year's expenses. By reviewing your previous budget, fleet managers can identify mistakes and determine areas that need improvement. This is to say that you can use your findings as the baseline for your next budget.
Reviewing your past expenses can also get you answers to questions such as:
- Did you overspend or underspend?
- What were your largest expense areas?
- Which areas of the fleet weren't fully utilized, and how can they be optimized?
- What unexpected expenses did you incur, and how did they come about?
- What efforts were made to reduce costs, and were they effective?
The answers to these types of questions can help shape the future of your fleet. They may also be excellent reference points to reflect upon throughout the year to ensure your budget stays aligned.
Forecast the Upcoming Year
There are different approaches to preparing a budget. One common technique is incremental budgeting. It involves adding a flat increase to the previous year's expenses, e.g. 7%. While the incremental techni que can be effective, it also has some flaws.
For starters, it doesn't factor in the appropriateness of the previous year's expenses. Second, a straight increase doesn't give fleet managers any reason to cut costs. As such, it could actually facilitate overspending.
The zero-based budgeting technique is more thorough. Instead of factoring only the changes from the previous year, the zero-based technique justifies each item in the budget from zero. And while this technique can be time-consuming, it can help build a cost-management culture in your organization.
Monitor Your Results Against the Budget
After you've developed a plan for the upcoming year, it is crucial to ensure everything is aligned. This means frequently checking fleet metrics against your set goals to benchmark against past years to stay on track. For instance, you could better control unforeseen expenses by measuring fleet productivity and managing downtime.
Bottom Line
As a fleet manager, you're tasked with managing and controlling expenses. To accomplish this, you need a functional and flawless budget. As outlined above, by gathering previous data and forecasting your expenses, you can create a sound budget to make your fleet successful.
If you need help with your fleet management, contact us today.
