If you’re trying to manage your appliance repair company’s vehicle assets in a less costly way and maximize profits, here are a few things to consider. The first decision that needs to be made regarding a vehicle asset is really the last thing you’re going to do in this process: Exit the vehicle from your fleet. This would be the exit of the vehicle asset out of the company.
Cost-Effective ApplianceRepair Fleet Management: Things to Consider
In order to get the best result for your company there are many considerations, the first of which is very important.
#1: Does Your Business Have Cash on Hand to Buy the Vehicle Asset Outright?
If that is the case then you may not need to read this blog. But seriously, if you have enough cash on hand to buy the vehicle asset outright that is hands down the best option.
You would want to consult with your CPA on what the best tax strategy is for YOUR INDIVIDUAL SITUATION and of course keep the vehicle as long as you’re getting tax benefits.
This also depends on the type of vehicle you’re purchasing and how much you’re using it for personal use vs business use.
Really reading and understanding tax code 179 as an appliance repair owner or General Manager is key, not only so you can maximize tax benefits but also because certain vehicles have greater tax benefits than others.
A true understanding of this tax code is important.
#2: Identifying Age/Mileage of the Vehicle Asset
If you can get to the point where you are purchasing outright up front you would next want to identify the age or mileage at which you want that asset removed from your fleet and be disciplined enough financially to make payments to yourself. In other words, vehicle asset savings that grow at the same rate that the vehicle asset your going to retire is devaluing.
A $30,000 vehicle being driven 25,000 miles per year would mean you should be saving $500 per month to rebuild that balance so when the vehicle asset is turning 6 years old and likely not giving any tax benefits and now also becoming more and more prone to major mechanical failure you can exit it from your fleet and purchase new. That is almost the perfect world when it comes to managing vehicle assets however it is very hard to get to that point financially with all the other challenges you are faced with running an appliance repair company.
“So how do we get to that point?” I hear you ask!
#3: Loans for Vehicle Assets
Seeing as most small business owners do not have wads of cash sitting around we are forced to follow this exact process with a twist. We do it all backwards, we must take a loan out on the vehicle asset and pay it down over a number of years. This is where discipline, knowledge and paying attention to the details can be crucial.
As we all know, car salespeople will try to talk you into what best lines their pockets. Don’t be tempted by low down payments and long loans with lower payments if you can possibly avoid it.
Let’s do some math.
$30,000 payment over 4 years equals roughly about $880 per month at a 5% interest rate. Divide that by roughly 20 working days in a month and you’re at about $44 per day to operate per vehicle asset. If the asset is being driven at 25,000 miles per year you now have ownership of the vehicle asset at 100,000 miles and likely it is in good enough condition to fetch you back somewhere between $5k-$10k.
This money should be applied back to your vehicle asset savings account and used as a deposit on the next vehicle coming into the fleet.
#4: Vehicle Maintenance and Repairs
Another strategy or consideration in the use of vehicle assets is maintenance and repairs. Throw in front brakes at $700 every 25,000 miles, oil and filter for $75 every 10,000 miles, $500 for tires every 40,000 miles, and in the event your hauling heavy equipment you could be looking at a transmission or engine replacement outside of the power train warranty that is typically only 60,000 miles. So now do we consider another strategy, only keeping the asset for 3 years, and retiring it from the fleet while it has potentially $10k-$15k value?
This is a strategy employed by many businesses to minimize vehicle maintenance and breakdown costs. Time off the road is actually more costly than the daily payments as we will dive into.
Being that we know what that vehicle asset is going to produce daily (with a good technician) is also a factor. If a technician brings in anywhere between $500 and $1,500 daily in revenue generated it does not make sense to have an older high mileage vehicle that could stop producing that revenue in your fleet (due to breakdowns) unless of course you have a solid plan B for when such breakdowns would occur.
But all things considered, having to rent a vehicle in those situations or having to have vehicle assets sitting around losing value and not generating revenue is also an expense you must factor into your company’s total vehicle asset budget.
One key pitfall that I have personally fallen into is not paying attention to the vehicle asset’s mileage being driven. If you have a technician who has to drive more miles than the average you must account for that and up the payments so you do not end up in the position where you have a higher payoff than the vehicle is worth. This is called being upside down in a payment.
Example: We had one technician in a remote market and as we only made minimal payments on a 4 year loan that at the time the vehicle asset hit 125,000 miles and had a resale value of $6k we still had a loan balance of $9k to pay off to get the pink slip. Then the transmission took a dump, so now $3k in repairs put us almost completely upside down.
The key is to manage the mileage alongside the payments and if at all possible try to still add money to your vehicle asset savings account in order to build to that point where you or your business is financing the purchases of the vehicle assets.
#5: Leasing a Vehicle Asset for Your Fleet
Another route to take is the lease option. We have tried this with one national provider. If your company is profitable enough it may be a good fit for you.
The way most leasing deals are structured is almost identical to what I’ve laid out. They want to know what mileage the vehicle will do annually and at what mileage or age you want the asset removed from the fleet. Your payments will be tailored to those numbers. Again it’s simply placing mileage and cost per month together so the vehicle is paid down at the same rate as it is depreciating.
Personally I prefer to manage this in house as I can now control the sale of the vehicle asset when it exits the company and place that money where it is needed.
#5: A Simple Plan for Managing Vehicle Assets
I was fortunate enough to sit down with the owner of a national chain of tanning salons one time. I asked him what his vehicle strategy was and he explained very simply. His Transit Connect vans were driven roughly 30,000 miles per year, he purchased brand new, he did 2 sets of brakes total, 4 oil and filter changes, 1 set of tires, and at 50,000 miles he sold the van for roughly 60% of the original purchase price.
The vehicle still has some power train warranty and he got the full depreciation allowed by the IRS over the time frame.
Lots of things to ponder. Good luck.
Owner, Lake Appliance Repair