How to use Financial Analysis

Tools for more accurately determining true asset ownership costs and replacement intervals


In today’s demanding and tough economy, fleet maintenance managers are experiencing even greater amounts of pressure to stay within budget, control costs, manage vehicles effectively throughout their lifetime and operate vehicles and shops as efficiently as possible. These challenges are on top of rising vehicle, shop equipment and tool costs and complexity.

Higher performance can be achieved by identifying the most important aspects of the fleet and maintenance operations, measuring them, using this information to evaluate the operation and then incorporating practices and methods to more efficiently and effectively manage the various targeted functions.

The more successful vehicle maintenance managers say the first step is to take stock of the operation, identify the critical drivers and true costs and figure out what it does and does not do well. This is where financial management, particularly such elements as life cycle analysis, cost analysis and benchmarking can be a great help as fleets attempt to do more with less.

Such financial management tools are effective for accurately determining true ownership economics and the most favorable replacement intervals by taking into account the total cash flow associated with the total life of an asset. This involves consideration of such things as purchase price and depreciation, insurance cost, cost or use of money, licensing and registration, driving patterns and mileage, fuel economy, scheduled maintenance, unscheduled maintenance and repair costs, future replacement values and residual values.

Having the real cost of each asset, along with historical data, also helps in making more informed decisions on whether to replace an asset, keep repairing it, rebuild it or change component specifications to lower the total cost of ownership.

LIFE CYCLES

Life cycle analysis should be performed regularly, with resale value being a consideration, especially when it comes to vehicles, advises Tony Vercillo, president of supply chain, distribution, fleet management and logistics consulting company IFMC. “Every piece of equipment has a highly predictable economic life that is very different from its useful life,” he says. “It may pay to shorten equipment life in order to get a higher resale value, rather than running it for say 10 years and getting nothing for it.”

Vercillo says the key to vehicle life cycle analysis is managing the three phases of ownership: acquisition and in-service inspection, cost of use over the life cycle and disposition costs (resale, damages, etc.).

He suggests using his 4 R Strategy which involves answering the following question: Which of these four alternatives is cheaper and makes the most sense for your company?

Should we run it as is for one more year?

Should we spend money, repair it and run one more year?

Should we completely rebuild it and run it for five more years?

Should we replace the asset?

The objective, says Vercillo, is to determine if it is better, from a cash-flow perspective, to sell-off assets earlier and recapture funds rather than hold-onto assets until they become boat anchors.

Spare assets need to be considered as well, he adds. Does it make sense to have them, especially if there are not being used regularly or at all? In the case of vehicles, there are still insurance, compliance and other expenses.

Vercillo points out there a number of models that can be used for life cycle costing and cost analysis, from simple Excel spreadsheets to sophisticated fleet management and maintenance software programs that can keep track of each asset and the to-date costs associated with it.

BUSINESS MEASURES

As would be expected, records of asset utilization and maintenance and repair costs, labor time, parts use, consumables, fuel use, etc., are the foundation to sound financial management. The better the recordkeeping, the better the intelligence to make good, cost-effective decisions on purchasing, maintaining and replacing assets.

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