Managing Fleet Vehicle Depreciation

There are two parts of the depreciation equation: acquisition cost and resale value. The latter gets the attention, but the original cost can be managed successfully and sometimes brings additional cost savings.

Fleet managers know there are two over-arching fleet costs: variable cost (fuel and vehicle repairs) and fixed cost (depreciation). Fuel-cost management has been in the headlines recently, with volatile fuel prices and alternative-fuel vehicles grabbing most of the attention.

Managing depreciation is every bit as important. Most of the attention given to managing depreciation goes to resale: how to maximize resale dollars, and, thus, minimize depreciation. Equal attention, however, should be given to the “front end” or acquisition cost, and the strategies experienced fleet managers use to reduce the prices they pay for fleet vehicles. It isn’t just about price, either.

Amortization vs Depreciation

It is relatively simple to understand the difference between amortization and depreciation. Ideally, the two numbers will be the same, or more realistically, fairly close.

Amortization

Amortization refers to when a vehicle (or any asset) is acquired, the company must decide how quickly its value declines with use, and reflect that decline on the books. Amortization is an entirely arbitrary number, so there is no need to “manage” it in the strictest sense of the word.

Depreciation

Depreciation occurs after an asset is taken from service and sold, the actual value that has been lost is determined by simply deducting the resale proceeds from the original cost. On average depreciation accounts for about 38% of the total cost to own and operate a vehicle. It is not arbitrary, and fleet managers must constantly track and adjust for both original cost and resale values to keep it as low as possible. There are a number of sourcing strategies experienced fleet managers consider when seeking to manage and reduce depreciation expense.

Strategic Sourcing for Vehicle Fleets

Strategic sourcing has become all the rage in the corporate world, and for good reason. Leveraging the volume of a corporation’s purchases makes purchasing simpler, and results in volume pricing.

Strategic sourcing applies the full leverage of the company’s purchasing power, whether buying vehicles, paper clips, or office furniture. Some companies have a culture that pushes responsibility down as close to the customer as possible. There’s nothing at all wrong with this; however, doing so as it pertains to acquiring fleet vehicles won’t achieve the best pricing available.

What Causes Depreciation?

Factors that affect a vehicle’s depreciation rate include the popularity, reliability, efficiency, safety and cost to maintain the vehicle. All cars depreciate at a different rate based on these factors. Some factors may be out of your control such as the resale value of older models plummeting once a car model is upgraded. There are, however, factors that you can control.

Depreciation is Controllable

Depreciation expense is one of two fleet expenses, the other being fuel, that drive overall costs more than all others combined. If a fleet manager can do nothing else, managing depreciation and fuel should be primary targets for control.

Depreciation is a function of several key items:

• Original cost. Whether capitalized cost in a fleet lease or purchasing cost for a company-owned fleet, it is the “starting point” in the depreciation process. Though you can’t do much to control the depreciation, you may be able to use leverage if you’re buying in volume. The more vehicles you purchase in a model year, the better chance you have of negotiating a lower price. Try finding vehicles with lower purchase prices that hold their value better and have higher resale value.
• Preventive maintenance. Depreciation is just a prediction of the value of vehicles as they age, but your vehicle has a chance of yielding higher value than the market offers. Your vehicle may also be worth less than the market value if it has mechanical issues and imperfections. Often forgotten as a key to managing depreciation, keeping vehicles properly maintained via a vigorous preventive maintenance regimen will help create that used product fleet managers seek. Also, keep the interiors clean and damage-free to receive maximum resale value.
• Timing. Cars typically lose up to 10% of their value immediately after purchase and up to 20% by the end of the first year. However, depreciation should slow after about two years of ownership. Selling your vehicle at the right time is crucial for getting the best value out of it. Vehicles with warranties, limited miles or minimal breakdowns/repairs are your ticket to selling above market value. You can also maximize the resale value by bringing it into service at the most advantageous point in the model-year.

6 Strategies to Manage Fleet Vehicle Depreciation

1.  Make reasonable predictions. Fleet fuel is relatively unpredictable due to a volatile market, but fleet deprecation can be predictable. Take advantage of vehicle and market data. Vehicle resale values aren’t always predictable, but they are transparent. You can monitor the current and predicted resale value of your fleet vehicles based on make and model at a certain mileage. This will help you strategize when you choose to resell. 
2.  Source strategically. Leverage volume wherever possible, no matter what the corporate structure is. The more vehicles a supplier provides, the better pricing the fleet can negotiate. 
3.  Spec vehicles properly. Choose equipment that helps drivers do the job while avoiding superfluous options that add cost but no resale value. Make sure vehicles have equipment that adds value. Also make sure to determine what options are best for your drivers, fleet and company. If the vehicle doesn’t meet your fleet’s needs, it’s probably not the one for you.
4.  Monitor lost productivity. If your vehicle is out of commission for repairs, you should monitor the impact of that downtime and productivity measures. Significant downtime may cause additional expense when trying to extend the life of the vehicle. This can be minimized with preventive maintenance and cycling the vehicle at lower mileages.
5.  Timing is everything. Buy as many vehicles early in the model-year as possible. Avoid selling during slow winter and summer used-vehicle market seasons. Keep emergency or out of stock purchases to a minimum.
6.  Stay organized with a fleet management company. At Ewald Fleet Solutions, our team develops custom solutions to fit your company’s needs. We’ll assist you in monitoring your vehicle depreciation so you get the best value when it’s time to sell.