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6 Strategies to Manage 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.
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 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 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 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.
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 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:
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