3. Financial Management

Question 1

Webster’s dictionary defines accounting as “the system of recording and summarizing business and financial transactions in books, and analyzing, verifying and reporting the results.”

The American Accounting Association defines it as “the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by the users of the information.”

Whatever the definition, accounting can be viewed simply as recording what was earned and what was expended, deriving how much profit or loss was realized, and analyzing the results.

Answer 1

1.1.1 Define accounting. (p.9)

Question 2

The information gained from accurate accounting methods and standards is very valuable. You can draw information from your recorded revenues and expenses, and use it to evaluate the financial consequences of different scenarios you are considering. This will help to eliminate any unsound judgments or poor managerial decisions and identify the consequences of acting too quickly or waiting too long.
Accounting information is also important to stockholders, taxpayers, the government, banks, creditors, employees, potential customers, and other external individuals who are making decisions about their involvement in your organization. They use your organization’s accounting information to decide whether to extend credit, invest, tax your organization, or monitor your organization’s performance. Many people confuse accounting with bookkeeping.

Answer 2

1.1.2 What are some uses of accounting information? (p.9)

Question 3

Managerial accounting provides the information needed inside the organization

Information derived from managerial accounting assists an organization or parts of an organization in making sound financial decisions regarding the organization and its future.

These decisions include:
* Financial decisions – how much, or if, money is needed to spend on new machinery, vehicles and equipment.
* Allocation decisions – how much, if any, money should be spent and what to spend it on.
* Production decisions – what to make, how to make it, and when to make it.
* Marketing decisions – how to sell it, what price to sell it, target market to emphasize, and how to get it there.

Answer 3

1.1.3 What is managerial accounting and how does it use information? (p.10)

Question 4

An organization can be referred to as a business entity. A business entity is any business organization that exists as an economic unit. For example, a store selling bed and bath products is a business entity. However, this business entity has a separate existence from its owners, employees, creditors and other businesses. This separate existence is called the business entity concept. Most business entities can be classified in one of three different ways:

Answer 4

1.2.1 Define the term business entity. (p. 11)

Question 5

Someone who is in business for themselves and the business is unincorporated. For example, if someone has a pool-cleaning service and is the sole owner, he is a single (sole) proprietor. The owner is responsible for all the business’ debts and needs to keep his personal financial information separate from his business financial information. If this single proprietorship fails, creditors can go after the owner’s personal assets to recoup their losses. This is one of the major disadvantages of a single proprietor business.

Answer 5

1.2.2 What is a single proprietor? (p.11)

Question 6

Partnership
This is a business owned by two or more persons and the business is unincorporated. There is usually an agreement between the owners (either verbal or written, although written is preferred) that states the terms of the partnership. Every partner is responsible for the debts of the partnership and for the actions of each of the partners

For example, if two lawyers operating a law practice form a partnership, each partner is responsible for paying the rent, electric, water and other bills. Each is also responsible for paying the employees they have in the practice. If one of the lawyers is sued for malpractice within the scope of the partnership and loses the case, the other partner is also responsible for paying the judgment, even though he may not have been sued personally or involved in the activity that brought on the malpractice lawsuit. As with a single proprietor, all partners in a partnership can have their personal assets seized by any creditors of the partnership.

Answer 6

1.2.3 Define the term partnership. (p.11)

Question 7

Corporation
This is a business that has been incorporated and is owned by stockholders. Because this business has been incorporated, it is a separate legal entity. A corporation is typically managed by a board of directors. One of the advantages of a corporation is that if the business fails, the personal assets of the owners (stockholders) are protected from any creditor. However, one of the disadvantages of a corporation is that it must pay taxes on its annual earnings just like individuals do. When corporations pay out dividends to shareholders, those payments also incur income- tax liabilities for the shareholders that receive them, even though the earnings used to pay those dividends were already taxed at the corporate level.

Answer 7

1.2.4 What is a corporation? (p.12)

Question 8

As a fleet professional, one should understand the different business organizations and how the type of organization that you work for is structured. The type of organization will have an impact on the type of accounting methods used, the types of insurance that may be necessary to protect the owners or stockholders, and how decisions are made inside an organization.

Answer 8

1.3.1 Why is it important for a Fleet Manager to have a firm grasp of accounting? (p.12)

Question 9

Audit
An audit is simply an examination and verification of a company’s financial and accounting records and supporting documents by a professional. Audit can be discussed under two headings.
* Internal audit. An internal audit is aimed at ensuring compliance to organizational operating procedures.
* External audit. The goal of an external audit is to ensure compliance with external reporting standards.

Answer 9

1.3.2 What is an audit? (p.14-15)

Question 10

Vehicle acquisition decisions
Acquisition decisions require information from both external reporting and internal management systems. For example, asset management ratios obtained from financial statements can be used to determine if the level of assets (vehicles) held is warranted. At the same time, a lifecycle cost approach that tracks all costs associated with the operation of a vehicle can signal the optimal time for vehicle replacement.

Answer 10

1.4.1 What information can be used to help in the vehicle acquisition decision? (p. 21)

Question 11

What would be more useful for the fleet manager is a cost accounting system that tracks vehicle operating (fuel, maintenance, administration), as well as fixed (depreciation) costs. Such a system might provide the following information:

Tracking costs in this manner allows the fleet manager to make better internal decisions. This method points out that the optimal disposal point would be at the end of year three. Lifecycle costing is based on timely and accurate vehicle cost information.

Answer 11

1.4.2 What does a cost accounting system track and what information can it provide?
(p.21)

Question 12

Lease vs. own decisions
Only a cost-based approach that tracks and apportions all direct and indirect costs of fleet operations provides the necessary information to make a decision about leasing or purchasing assets. A traditional accounting approach may show the value of fleet assets held but will not show the cost of activities needed to provide that service. Using the same example as above, is it possible for a fleet manager to determine strictly by reviewing the external reporting information whether he should lease or buy these assets? The financial statements will show the book value of the assets and tax implications but will not provide the complete costing information needed to make this decision.

Answer 12

1.4.3 What information does the Fleet Manager need to make the lease vs. own
decision? (p.22)

Question 13

A chart of accounts is usually established within an organization to define how money, or the equivalent, is spent or received. It is used to organize the finances of the organization and to segregate expenditures, revenue, assets, and liabilities. Each account is often assigned a number that is used by accounting clerks or by automated systems to record transactions into the organization’s books.

Answer 13

1.5.1 What is a chart of accounts? (p.24)

Question 14

Assets
By definition, an asset is anything tangible or intangible that is capable of being owned or controlled to produce value. For example, cash is an asset. Other assets include vehicles, land, buildings, equipment, accounts receivable, inventory, pre- paid expenses, and investments. Assets are listed on a company’s balance sheet and the value of an asset can change on a daily basis.
Assets are often classified into multiple categories listed below:

Answer 14

1.5.2 Define the term asset. (p.24)

Question 15

• Short-term Assets
• Long–term Assets
• Intangible Assets
• Short-term Assets. These assets include cash and other assets that can be converted to cash or consumed in a short period of time. Some examplesinclude: cash, accounts receivable, inventory, vehicles, and pre-paid
  expenses.
• Long–term Assets. These assets are usually held for many years and are
  not intended to be disposed of in the near future. Examples include; bonds, common stock, land, buildings, and pensions funds.
• Intangible Assets. These assets have value but usually lack physical substance. Examples include patents, copyrights, trademarks, etc. A good example of an intangible asset is a company’s logo. Consumers may be drawn to products that contain a certain logo thus the logo itself has value and can be recorded in an organization’s financial statements.

Answer 15

1.5.3 What are the three categories of assets? (p.24-25)

Question 16

Liabilities
By definition, a liability is a debt and obligation of an organization. Examples include: borrowing money from banks or leasing companies, salaries and wages earned by employees or contractors but not yet paid, or receipt of good and services from another organization in advance of payment.

Answer 16

1.5.4 Define the term liability. (p.25)

Question 17

• Short-term Liabilities. These liabilities are usually settled within one year or less. Examples are: Accounts payable, salaries payable, taxes payable, etc.
• Long-term liabilities. These liabilities are not expected to be settled within one year. Examples are: Notes payable, long-term leases, pension obligations, product warranties, bonds, etc.

Answer 17

1.5.5 What are the two categories of liabilities? (p.25)

Question 18

Income/ Revenue
By definition, revenue is the amount of money that is brought into an organization by its business activities. If that organization is a government entity, it may earn revenue through taxation, fees, fines, etc. Commercial organizations typically earn revenue by selling a product or providing a service. Income is reported on an organization’s income statement.

Answer 18

1.5.6 Define the terms income/revenue. (p.25)

Question 19

Expenses
The International Accounting Standard Board defines expenses as a decrease in economic benefit during an accounting period in the form of outflows or depletions of assets that result in decreases in equity. Examples are: Depreciation, salaries, supplies, interest expenses, etc.

Answer 19

1.5.7 Define the term expense. (p.25)

Question 20

DEPRECIATION
As shown earlier, an organization’s assets are recorded on the books and reported on the balance sheet. Many long-term assets (assets held for longer than a year) will decline in value over time. During each accounting period a portion of the asset is being used up or declining in value and should be reflected on the books. Every asset has a useful life and will not last forever. One exception to this could be a piece of land, because land is generally assumed to last indefinitely.
In effect, depreciation is the transfer of the value of an asset shown on the balance sheet to the income statement in the form of an expense. Depreciation is often the largest expense category when operating a fleet of vehicles.
There are several different forms of depreciation that can be used over the life of an asset to record the loss of value or use. For tax purposes, only certain types of depreciation are allowed depending on the asset. However, a company may choose to use a different form of depreciation or time period for internal reporting. We will cover some of the most common depreciation methods below.

Answer 20

1.6.1 What is depreciation and what methods can be used to calculate it? (p.28)

Question 21

Straight-Line Depreciation
This is the most straightforward method used. To calculate this, you will need to know the number of years this asset is expected to last and what the asset’s expected value will be at the end of its useful life.

Answer 21

1.6.2 How do you calculate straight line depreciation? (p.28-29)

Question 22

ABC Company purchased a van for $25,000 and expects it to last for 5 years. The salvage value at the end of five years is $10,000. Under the Straight Line Method, this asset depreciated at 20% per year. In this method, we will ‘double’ that to 40% in the early years.

Answer 22

1.6.3 How would you calculate depreciation using the Double Declining Balance
Method? (p.27-28)

Question 23

Straight-Line Depreciation
This is the most straightforward method used. To calculate this, you will need to know the number of years this asset is expected to last and what the asset’s expected value will be at the end of its useful life.

Answer 23

1.6.4 What depreciation method would you use for a machine that is expected to
produce a fixed quantity of items? (p.28)

Question 24

The first step in establishing an effective chargeback system is to identify and track vehicle expenses.

Answer 24

2.1.1 Why is it important to track vehicle expenses? (p.33)

Question 25

The first step in establishing an effective chargeback system is to identify and track vehicle expenses. To facilitate this task, NAFA has developed a Recommended Automobile Classification Expenses (RACE) system. The standardization of vehicle expenses achieves two primary goals: * It provides guidance to fleet management personnel in classification of vehicle expenses for internal control and management * It provides common standards to measure the effectiveness of cost controls The RACE system provides for three main categories of vehicle expenses – fixed, operating and incidental

Answer 25

2.1.2 Describe the RACE system. (p.33)

Question 26

Fixed Fixed costs are those expenses that will incur by just having a vehicle, even if it sits in the parking lot and is never used. Fixed costs include the following: * Depreciation - This is usually a fleet’s biggest expense. However, there have been times when high fuel prices may cause fuel to be a fleet’s largest expense. * Cost of money, or interest - This could be the interest that is paid on a lease for the vehicle, or it could be the loss of interest that occurs if you spent the money in acquiring the vehicle instead of investing it. You may even consider “opportunity costs” as part of this. This is the loss of profit- making potential because you invested in vehicles instead of research and development or additional manufacturing capacity. * Administrative overhead - the costs associated with the company or government as a whole that are apportioned over the entire business. For example, general payroll costs, building insurance, landscape maintenance, or any other function that the business performs for its departments and divisions are apportioned to each using group according to the amount of the service that they consume. Taking the payroll function, if it costs the Payroll Department $1M per month to process payroll checks, and you have employees that amount to 1% of the workforce, then the Fleet Department has incurred $10,000 in costs from the Payroll Department. Fleet administration costs, such as salaries and infrastructures costs can be tracked and apportioned to fleet users. * Insurance premiums (or subrogation and other administrative costs for self-insured organizations) - Insurance should only be considered in a lifecycle model if the premiums are allocated individually to vehicles. If your company or entity is self-insured, then insurance premiums are usually spread equally over the entire fleet, negating the use of the premiums in a lifecycle model. * Licenses and taxes - Any fees paid on the vehicles each year are also a fixed expense.

Answer 26

2.1.3 Describe fixed expenses and give some examples that are common in fleets. (p.33-34)

Question 27

he easiest way to figure out whether the cost is a fixed expense or not is to consider the following general “rules of thumb”: * If I acquire a vehicle and I do nothing with it and leave it in the parking lot, any cost I incur will be a fixed cost. * If I acquire a vehicle, and I add items to it like a light bar, but then I leave it in the parking lot and do nothing with it, the cost of the light bar addition would be considered part of the capitalization of the vehicle. * If I have a vehicle that needs refurbishment, and the cost of refurbishing the vehicle is more than 50% of its value (using a guide like Kelly Blue Book or NADA), then the cost of refurbishment is considered part of a recapitalization cost. * If I have a vehicle that needs refurbishment, and the cost of the refurbishment is less than 50% of the vehicle’s value, then it can be considered an operating cost because the vehicle can still be used for its original purpose.

Answer 27

2.1.4 What are the “rules of thumb” when deciding whether an expense is fixed or not? (p.34)

Question 28

Operating Operating expenses are easier to understand and measure. They are considered to be anything or item that is consumed during the course of the vehicle’s life. The more you operate a vehicle, the more fuel and oil you use, the more likely it is that you will have to buy new tires, the more repairs and preventive maintenance you perform.

Answer 28

2.1.5 What are operating expenses? (p.34-35)

Question 29

Common operating expenses are: * Fuel – includes basic fuel, as well as additives * Oil – includes engine oil and additives, as well as oil changes (lubrication and filters should be included under maintenance charges) * Tires – includes purchase or replacement tires and snow tires, as well as repair and rotation charges (balancing and alignment charges should be included as a maintenance charge) * Maintenance – includes all mechanical and electrical maintenance (chassis lubrication, transmission and hydraulic fluids, replacement windshield and wipers, filters, wheel balancing and alignment, brake adjustment and towing). For fleets that operate their own maintenance garages this also includes parts inventory, shop supplies, mechanic training, shop and equipment maintenance, and so forth.

Answer 29

2.1.6 List some common fleet operating expenses. (p.35)

Question 30

There are also those who consider the refurbishment of a vehicle to be an operating expense, as this expense occurs as a result of driving the vehicle and placing wear and tear on it. However, refurbishment needs to be looked at as more than just fixing a vehicle. Normally a vehicle would be used until an organization decides that it no longer needs it, or until it reaches the end of a predetermined lifecycle. However, if the organization decides that bringing the vehicle back up to operating condition is more fiscally advantageous than replacing it with a new one, the vehicle is refurbished and then recapitalized at its new present value. This does have implications, as the asset needs to now be recapitalized on the books of the organization, and it affects the calculations for personal use. Because of this, refurbishment is not an operating expense.

Answer 30

2.1.7 Should vehicle repairs and refurbishment be considered operating expenses? (p.35)

Question 31

Incidentals Incidental expenses include everything else. These expenses are intermittent and vary widely. They include car washes, parking fees, toll costs and buying miscellaneous items like a set of floor mats or seat covers. These items are not really maintenance and they do not add to the capitalized value of a vehicle, hence they are incidental expenses. When doing a lifecycle analysis, it is important to figure out exactly how much in incidental costs you have and then exclude them from any lifecycle analysis you conduct. Since these costs are not related to having the vehicle in a safe and serviceable operating condition, they are not costs that can be considered.

Answer 31

2.1.8 What are incidental expenses? (p.35-36)

Question 32

Other terminology While these are the categories established by NAFA, many fleet departments use alternate terminology. Some common terms are: * Direct costs – includes the category above described as operating costs, or the costs that can be linked directly to fleet operations * Indirect costs – includes some of the fixed and the incidental categories of fleet expenses * Overhead costs – indirect costs The use of the NAFA standard terminology avoids confusion when discussing and comparing the costs of fleet operations. Even fleet departments that use other terminology should attempt to map their expenses to these accepted categories.

Answer 32

2.1.9 Explain other terminology for expenses that may be used in fleets? (p.36)

Question 33

COST ASSIGNMENT AND ALLOCATION SYSTEMS Knowledge of these expense categories is essential in establishing a cost assignment or allocation system. This type of system deals with linking costs or groups of costs with one or more cost objectives, such as products, departments, or divisions. Ideally, costs should be assigned to the cost objective that caused it. In short, cost allocation tries to identify costs with organizations via some function representing causation.

Answer 33

2.2.1 What is a cost allocation system? (p.36)

Question 34

A Cost Allocation spectrum illustrates the array of approaches available for cost allocation. ABCDEF A – Don’t know costs; don’t care B – Know most costs; general fund; no allocation or billing C – Know costs; general fund; allocate costs but no billing D – Know, allocate and bill operating costs; capital fund E – Know, allocate and bill most costs; operating and vehicle depreciation expenses recovered F – Know, allocate and bill all costs including infrastructure and outside services The cost allocation spectrum differentiates between knowing costs, allocating costs and billing for costs. Organizations who know their costs have identified cost categories and monitor these expenses. Allocation is one step further, as costs are divided according to the customer who incurs them, even though the customer is not billed. One step further along the spectrum is where costs are known, allocated and the applicable customer is billed for their share of expenses.

Answer 34

2.2.2 What does the Cost Allocation Spectrum illustrate? (p.36)

Question 35

With this in mind, the positions identified on the spectrum can be further described as follows: * Position A organizations do not track the costs of fleet operations. Fleets are given a central budget, pay the bills as they occur and are not overly concerned with recovering these costs from customers, or even having full knowledge of what these costs are. This might be the case for a very small fleet where the costs of tracking expenses outweigh the value gained. * Position B fleets operate in a similar fashion except that they know the majority of their costs. For a variety of reasons, they fund these costs centrally and do not allocate them to customers. * Position C fleets know their costs and allocate them to customers, but do not recover from their customers by billing. * Position D fleets know and allocate operating costs and bill customers for them. They operate a general (capital) fund for vehicle replacement. * Position E fleet departments know, allocate and bill for the majority of operating and capital costs related to fleet. * Position F fleets have a comprehensive system that tracks even incidental and all overhead costs. These are allocated or charged to customers through a variety of rates and/or surcharges that will be discussed in the next chapter.

Answer 35

2.2.3 Describe the positions identified on the Cost Allocation Spectrum. (p.37)

Question 36

General fund A general fund exists where a fleet department receives an annual budget allocation to cover costs of fleet operations. The general fund may be sufficient to cover only capitalization costs, or all capital, operating, and incidental expenses of fleet operations. Where an expense is covered by the general fund, no recovery is made from customers. As mentioned, fleet departments may have a central budget for vehicle replacement (capitalization costs). This affords the fleet manager visibility and control over the acquisition and disposal process and the authority to decide what vehicles are to be procured. Operating costs may be paid from the central fund as well. This has the disadvantage of decreasing user accountability in areas such as fuel economy and crash expense management.

Answer 36

2.3.1 What is a General Fund? (p.37-38)

Question 37

The type of organization and management goals and expectations are the determining factors in whether to adopt a general fund structure. Small, relatively straightforward fleet operations may benefit from the simplicity of this structure. The costs of implementing an internal service fund and administering internal cost recovery may outweigh the advantages for this type of organization.

Answer 37

2.3.2 What are the determining factors in adopting a General Fund? (p.38)

Question 38

Internal service fund Internal service funds are established to account for the financing of goods and services provided by one department or unit to other departments or units of the same organization on a cost reimbursement basis. Whether established to cover solely operating expenses or both operating and capital expenses, internal service funds should not generate profits. They should be designed so that the rates charged simply compensate for the expense of running the fleet. As such, a surplus or deficit in the fund indicates that the rates being charged may be too high or too low and should be reviewed and adjusted.

Answer 38

2.3.3 What is an Internal Service Fund (ISF)? (p.38)

Question 39

This funding structure is very popular in government organizations as a means to enhance departmental accountability. Types of operations that use internal service funds include graphic/printing services, communications, property management, information systems, purchasing, risk management, and fleet operations. An important factor to keep in mind is that the cost of this internal cost allocation and billing structure should not exceed the benefits to the organization. There must be a measurable net benefit to implementing this type of structure.

Answer 39

2.3.4 What types of organizations use an ISF? (p.38)

Question 40

Enterprise fund The main distinction between an internal service fund and an enterprise fund is that in the case of the latter, at least some of the customers are external. An enterprise fund is a fund used to account for revenues received for goods or services provided to users on a continuing basis and primarily financed through user charges.

Answer 40

2.3.5 What is an Enterprise Fund? (p.38)

Question 41

Examples of common enterprise funds include airports, ambulance services, parking, solid waste disposal, utilities (i.e., power, water and gas), golf courses, transit, and libraries. The type of structure to be used by a fleet department may be dictated by the organization itself and the customers it serves. While an organization may have leeway to determine if it wishes to identify, track, recover and/or bill for expenses, whether it uses an internal service fund or enterprise fund will be dictated by the nature of its customers. Inclusion of external customers necessitates the use of an enterprise fund.

Answer 41

2.3.6 What types of organizations use an Enterprise Fund? (p.38-39)

Question 42

Improving knowledge of fleet costs Although dependent on organization objectives and structure, it is generally true that it is desirable for most organizations to move to the right on the cost allocation spectrum. This can be achieved through the implementation of a cost accounting system such as Activity Based Cost accounting. The following three steps will assist an organization in improving their knowledge of fleet costs: * In conjunction with senior management, determine its position on the spectrum and its ideal position for the future * Identify any impediments to moving to that ideal position * Implement cost accounting processes to allow it to reach that position

Answer 42

2.3.7 What three steps can an organization take to improve knowledge of fleet costs? (p.39)

Question 43

Once the goal has been identified, organizations need to research the impediments to reaching this objective. The common hurdles can be classed in three distinct categories: * Behavioural – management and employee attitudes * Technical – absence of necessary cost information and lack of automation to gather and analyze it * Structural – lack of distinct business units, lines of authority, and responsibility All of these impediments must be resolved in order to move to the right along the spectrum. Buy-in must be solicited from management and employees; automated systems must be introduced to collect and track the necessary information; and departmental responsibilities must be clarified.

Answer 43

2.3.8 What are common hurdles to an organization achieving an identified goal? (p.39- 40)

Question 44

Once the organization is ready to implement a cost accounting system in order to move towards their objective, there are four steps involved: * Develop an activity dictionary * Determine how much the organization is spending on each activity * Identify the organization’s products, services and customers * Select activity cost drivers that link activity costs to the organization’s products, services and customers Finally, organizations can implement cost accounting processes to allow them to reach that position. These four steps — identify starting point, identify ideal position, identify impediments and implement cost accounting system — will assist an organization to improve its knowledge of fleet costs and equitably allocate resources to customers.

Answer 44

2.3.9 What four steps should an organization take once it is ready to implement a cost accounting system? (p.40)

Question 45

The purchase of vehicles requires a considerable capital outlay as well as extra focus on a variety of administrative tasks to manage the acquisition, initial licensing and renewals, personal property tax payments, title retention and remarketing of vehicles.

Answer 45

3.1.1 Describe some of the administrative tasks involved in purchasing a vehicle. (p.43)

Question 46

Purchasing Methods - Debt Some companies use debt as a part of their overall corporate financial strategy. Companies may use any one or a combination of all types of debt to finance vehicle acquisitions. Some debt instruments are governed by covenants or rules that require the issuer to maintain certain financial standards, such as debt to equity ratios and requirements to maintain minimum levels of liquidity. There may also be non-financial covenants that require the issuer to provide certain information to bondholders, or to restrict the sale of assets or changes of control. Covenants are designed to ensure that bondholders will receive their interest and principal payments on time.

Answer 46

3.1.2 Describe the debt purchasing method. (p.43-44)

Question 47

Other considerations: * Equity securities do not ensure any payment to investors by the issuer. * Bond prices are determined by the market, and are based on the issuer’s credit rating, term to maturity, coupon rate, and market yield on comparable securities (more on this in later lessons). * Stock prices are set by the market based on the expected level and value of the issuer’s current and future earnings. * Bond investors are relatively certain of their expected cash flows and rate of return of both income and return of principal (if they hold to maturity). * Equity investors are not assured of future income or investment return.

Answer 47

3.1.3 List some of the other considerations involved in purchasing with debt. (p.44)

Question 48

Secured and Unsecured A debt obligation is considered secured if creditors have recourse to the assets of the company on a proprietary basis, or otherwise ahead of general claims against the company. Unsecured debt consists of financial obligations where creditors do not have recourse to the assets of the borrower to satisfy their claims.

Answer 48

3.1.4 What are secured and unsecured debts? (p.44)

Question 49

Private and Public Private debts are bank-loan type obligations. Public debt is a general description covering all financial instruments that are freely tradable on a public exchange or over the counter with few, if any, restrictions.

Answer 49

3.1.5 What is the difference between a public and private debt? (p.44)

Question 50

Term Loan A basic loan or “term loan” is the simplest form of debt. It consists of an agreement to lend a fixed amount of money, called the principal sum, for a fixed period of time, with this amount to be repaid by a certain date. Interest, which is calculated as a percentage of the principal sum per year, will also have to be paid by that date, or may be paid periodically in the interval, such as annually or monthly. Such loans are also colloquially called bullet loans, particularly if there is only a single payment at the end – the “bullet” – without a “stream” of interest payments during the “life” of the loan. There are many ways to calculate interest but the standard method is the annual percentage rate (APR), widely used and required by regulation in the United States and the United Kingdom, though there are different forms of APR.

Answer 50

3.1.6 What is a term loan? (p.44)

Question 51

Syndication A syndicated loan is a loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan, usually many millions of dollars. In such a case, a syndicate of banks can each agree to put forward a portion of the principal sum. Loan syndication is a risk management tool that allows the lead banks underwriting the debt to reduce their risk and free up lending capacity. Syndication is more common with larger fleets, as some financial institutions are not willing to take the risk of lending too much capital to a single organization.

Answer 51

3.1.7 What is a syndicated loan? (p.44)

Question 52

Bonds Bonds are debt securities issued by certain institutions and are one of the three main asset classes, along with stock and cash equivalents. Many companies, municipalities, states and foreign governments issue bonds to investors in a marketplace when they wish to borrow money for the purpose of financing a variety of projects for a defined period of time at a fixed interest rate. The principal determinants of a bond’s interest rate are credit quality and duration. A bond entitles the holder to repayment of the principal sum at the time of maturity, plus interest over the life of the investment. As such, bonds have a fixed lifetime with maturities ranging from a 90-day Treasury bill to a 30-year government bond. Corporate and municipal bonds are commonly in the three to 10-year range. At the bond’s maturity, the money should be repaid in full. Interest may be added to the end payment, or can be paid in regular installments (known as coupons) during the life of the bond. Bonds may be traded in the bond markets, and are widely used as relatively safe investments in comparison to equity.

Answer 52

3.1.8 What are bonds, and how are they used? (p.45)

Question 53

Stocks While bonds are debt securities, stocks are considered as equity for the holder with ownership interest and no contractual obligation. Equity investors expect their ownership interest will increase in value along with the issuing company’s growth in revenue and profits; however, dividends paid to investors are solely at the discretion of the issuer’s management and Board of Directors. Conversely, debt issuers have a legal obligation to pay, and failure to do so would put them in default and could impact a company’s position as a going concern. Bondholders are secured creditors and are the first to be paid in the event of bankruptcy liquidation. In the event of liquidation, payment order is as follows with typically nothing left for common shareholders: * Secured Creditors (including bondholders) * Unsecured Creditors (typically bank loans) * Preferred shareholders * Common shareholders

Answer 53

3.1.9 What are stocks? (p.45)

Question 54

Mezzanine Capital This refers to a subordinated debt or preferred equity instrument, often used by smaller companies, that represents a claim on a company’s assets, which is senior only to that of the common shares. Mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock. It is often a more expensive financing source than secured debt or senior debt, involves additional risk and, in return, mezzanine debt holders require a higher return for their investment than secured or other more senior lenders.

Answer 54

3.1.10 What is mezzanine financing? (p.45)

Question 55

* Securitization – This occurs when illiquid assets are put through a financial process to transform them into a security. An example would be Mortgage Backed Securities (MBS), which is an asset-backed security secured by a collection of mortgages. * Treasuries– A United States Treasury security is a government debt issued by the US Department of the Treasury, and comes in four types: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS). * Swaps - Typically, a swap contract exchanges fixed rate obligations for a floating rate instrument in the same currency. In its simplest form, the two parties to an interest rate swap exchange their interest payment obligations (no principal changes hands) on two different kinds of debt instruments, one being a fixed interest rate, the other being a floating rate. * Certificate of Deposit (CD) – Is issued by commercial banks as a promissory note that entitles the bearer to a certain interest rate at a certain maturity date. * Interest Indices: o LIBOR – An acronym for the London InterBank Offered Rate, which is the rate that major banks in London charge to other banks to borrow from them. It is a key rate index for international borrowing. o Prime – Is based upon the Federal Funds Rate, (the rate at which banks in the United States lend money to other banks), and is a major rate that determines rates for many different loan programs and credit offerings. o Commercial Paper – Is an unsecured short-term debt instrument issued by a corporation. It is generally used to finance short-term obligations such as accounts receivables, inventories, etc., and rates are influenced based on the financial reputation of the corporation.

Answer 55

3.1.11 Describe some other options to finance debt. (p.46)

Question 56

LEASE OPTION A lease is a rental that, by contract, is clearly defined as to length, cost and stipulations. Leasing is popular because it enables businesses to obtain needed resources and preserves capital that can be applied to otherwise more profitable investments. A lease is basically a longer-term rental agreement that comes in a variety of forms which all involve incurring debt. Budget constraints and aging fleets opened a vast frontier to leasing for both public and private business sectors. Organizations also select leasing as their means to acquire and manage assets because they consider the associated vehicle management activities such as maintenance management and crash management to be outside their core competencies.

Answer 56

3.2.1 Define the term lease. (p.46)

Question 57

Types of Leases Many names are associated with the types and subtypes of leases. However, for accounting purposes, leases are strictly categorized as being either capital leases or operating leases. The classification of a lease affects how it is reported in the financial statements. The appropriate category depends on the answers to four questions: * Does the ownership (title) transfer at the end of the lease? * Does the lease contain an option to purchase the asset at a bargain price? * Is the term of the lease at least 75% of the estimated economic life of the asset? * Is the present value of the future minimum lease payments at least 90% of the fair market value of the asset?

Answer 57

3.2.2 What four questions should be asked in order to categorize leases? (p.46-47)

Question 58

A capital lease is classified and accounted for by the lessee as a purchase and by the lessor as a sale or financing transaction. Answering “yes” to any one of the above questions requires that the lease be capitalized and recorded on the balance sheet. If all four questions can be answered “no,” the lease is considered to be an operating lease and lease payments are expensed. Capital leases do not include maintenance and cannot be cancelled. They must be capitalized and the leased assets shown on the lessee’s balance sheet. A capital lease may also be known as a finance lease or direct lease. Unless a leasing transaction is a true Capital Lease, the lessee does not retain the rights to tax depreciation. The Lessee is also responsible for vehicle maintenance and insurance.

Answer 58

3.2.3 What is a capital lease? (p.47)

Question 59

The following are types of capital leases: * Finance Lease – Finance leases are full-payout, non-cancellable agreements in which the lessee is responsible for vehicle maintenance, taxes and insurance. Sometimes referred to as a “lease-purchase,” the financial lease is most attractive in cases where the lessee wants the tax benefits of ownership or expects the equipment’s residual value to be high. Finance leases are typically structured as equipment financing agreements with residuals up to 10%. The lessee purchases the equipment upon lease termination at a pre-agreed amount, usually $1. The term of a finance lease tends to be longer, nearly covering the useful life of the equipment. * Direct Financing Lease (Direct Lease) – A non-leveraged lease by a lessor in which the lease meets any of the defined criteria of a capital lease, plus certain additional criteria. A direct lease is a financial arrangement and contract through which the lessor (a financial institution, a leasing company or similar entity other than a manufacturer or dealer) agrees to furnish, and the lessee agrees to hold assets for a set period of time, at an agreed upon price, and in accordance with specified terms and conditions.

Answer 59

3.2.4 What is the difference between a finance lease and direct financing lease?(p.47)

Question 60

Operating Lease An operating lease is particularly attractive to organizations that continually update or replace equipment, want to use equipment without ownership and want to return equipment at lease-end to avoid technological obsolescence. An operating lease usually results in the lowest payment of any financing alternative and is an excellent strategy for bypassing capital budgeting restraints. Operating leases include a cancellation clause and they may, or may not, include vehicle maintenance. Under an operating lease, the leased asset is not considered an asset of the lessee; the lessee records the asset as an operating expense. This qualification for off-balance sheet treatment can result in improved return on asset (ROA or ROI) due to a lower asset base. It can also result in higher reported earnings in the early years of the lease. Consumers, governmental jurisdictions and commercial organizations that lease vehicles almost exclusively use operating leases as their leasing method. Operating leases are further defined by the assumption of the risk associated with the residual value in the leasing equation, either by the lessor or the lessee.

Answer 60

3.2.5 What is an operating lease? (p.47-48)

Question 61

Operating leases include a cancellation clause and they may, or may not, include vehicle maintenance. Under an operating lease, the leased asset is not considered an asset of the lessee; the lessee records the asset as an operating expense. This qualification for off-balance sheet treatment can result in improved return on asset (ROA or ROI) due to a lower asset base. It can also result in higher reported earnings in the early years of the lease. Consumers, governmental jurisdictions and commercial organizations that lease vehicles almost exclusively use operating leases as their leasing method. Operating leases are further defined by the assumption of the risk associated with the residual value in the leasing equation, either by the lessor or the lessee.

Answer 61

3.2.6 What are the advantages to using an operating lease? (p.48)

Question 62

Following are various operating lease types: * Closed-End Lease – Closed-end leases are based on the concept that the number of miles driven annually is fairly predictable and that its value at the end of the lease (the residual) is therefore somewhat predictable. Closed- end leases are written for a fixed term, perhaps three years, providing for a flat monthly payment, a predetermined mileage limit and set penalties for exceeding the mileage limit, and for any excessive wear and tear. Clearly defining “fair wear and tear” at the outset of the lease is a critical point of agreement to avoid costly differences in perception at lease termination. At the time of the lease, the leasing company estimates the vehicle’s lease-end residual value and, at the end of the term, provided all terms are met satisfactorily, the lessee (borrower) returns the unit to the owner (lessor) without further obligation. The lessor assumes full risk for the remarketing of the vehicle. Closed-end leases are also known as “walk-away leases” or “net leases” and may also include vehicle maintenance and/or insurance clauses. The organization never takes ownership of vehicles under this financing arrangement. * Open-End Lease – Open-end leases account for 95% of all leases used in fleet acquisitions. The open-end lease usually has a short minimum term of one to two years and continues thereafter on a month-to-month basis until the agreement is terminated. Open-end leases are often erroneously referred to as a “finance lease”. However, it is a financing method in which the amount owed at the end of the lease term is based on the difference between the leased unit’s residual value (resale value) and its realized value (depreciation.) Open-end lease costs are generally lower than closed-end leases because, unlike the closed-end lease, the lessee accepts the risk for the residual value of a vehicle when sold at lease termination. Similar to closed-end lease arrangements, the organization does not take ownership of the vehicle when the lease terminates. Most open-end leases contain a “step-down” payment scheduled wherein payments decline annually with no limits on mileage or wear and tear. * Terminal Rental Adjustment Clause, (TRAC) – Most open-end leases also contain what is known as a TRAC clause that ties the lessee to whatever difference may exist between the book and selling values of the unit upon remarketing. TRAC leases are an Internal Revenue Code defined variation on traditional open-end leases, combining all the advantages of leasing while keeping the option to purchase the equipment at the end of the lease term at a price set according to the amortization schedule when the lease term began. The primary difference between TRAC and most open-end leases is how the difference between the projected residual value and the actual sale proceeds may be treated. In a traditional open-end lease this difference is shown as a loss or gain to the lessee. In a TRAC lease this difference may be used to adjust the lease rate, ensuring any variation from the projected residual value is accounted for as an operating expense. This type of open-end lease may have significant tax advantages for non-public lessees.

Answer 62

3.2.7 Describe several types of operating leases. (p.48-49)

Question 63

Lease Term: The lease term is defined as the contractual term plus renewals where the lessee has a “significant economic incentive” to exercise the options. Significant economic incentive as I understand it would include bargain renewals and renewals where the lessees would suffer an economic penalty for failure to renew.

Answer 63

3.2.8 Describe lease term. (p.49-50)

Question 64

Estimated Lease Payments: Includes interim rents, contractual rents, renewal and purchase options where the lessee has a significant economic incentive to exercise, termination penalties, the expected payment under residual guarantees, variable lease payments that are based on a rate or index and estimated variable payments based on usage or lessee performance that are “disguised” minimum payments (where the lease has below market contractual payments and has variable payments designed to “make up the difference” for the lessor). Those variable rents based on a rate (i.e. Libor) or an index (i.e. CPI) are booked based on spot rates with adjustments booked when the rate change changes contractual lease payments. However, in deliberations, the Boards tentatively decided to eliminate the requirement to estimate and record other contingent payments, notably those based on sales or excess asset usage. Estimates of renewal and purchase options are to be reviewed on each reporting date and if it becomes evident that the lessee has a significant economic incentive to exercise then the options must be recorded as estimated payments by adjusting the asset and liability balances. In addition, the ROU asset amortization and imputed interest schedules are adjusted as though the transaction is a new lease beginning on the adjustment date.

Answer 64

3.2.9 What consists of an estimated lease payment? (p.50)

Question 65

Residual Guarantees: Estimated payments (not the full amount of the guarantee) under residual guarantees are booked as an estimated payment with review and adjustment at each reporting date. For lessors, a residual guarantee from the lessee or a third party does not change a residual to a financial asset (receivable). However, a manufacturer’s sale with a guaranteed resale or residual value would no longer be accounted for as leases. However, sales with buy-back agreements where the buy-back amount is less than the original sales price would be treated as leases.

Answer 65

3.2.10 What are residual guarantees? (p.50)

Question 66

Short Term Lease and Short Term Renewals: A short-term lease is a lease that at the date of commencement of the lease has a maximum possible lease term, including any options to renew or extend, of 12 months or less. Lessees can either account for payments under these as an operating expense or as capitalized amounts under the new model (see below). Lessors may elect, as an accounting policy for a class of assets, to account for all short-term leases like today’s operating leases. Renewals with terms of 12 months or less are considered short-term leases (eligible for off balance sheet operating lease accounting) where both the lessee and lessor have the right to terminate the renewal without significant penalty. Initial accounting is done at commencement (not at inception as proposed in the first ED) and is to capitalize all leases (except short term leases) as a right of use (ROU) asset and lease liability at the present value of the estimated lease payments. The present value discount rate is the lessee’s incremental borrowing rate or the implicit rate in the lease, if known. For subsequent accounting, the ROU asset is amortized straight line over the lease term and interest is imputed on the lease liability. Adjustments to estimated payments change the ROU asset and lease liability values and change the remaining ROU asset amortization and imputed interest on the liability. Lessees must separate non-lease costs from bundled lease payments using observable market information. If the lessee cannot determine the breakdown, the full payment must be capitalized. Lessees may elect to use the operating lease method for short-term leases. Sale leasebacks that qualify as sales under the revenue recognition rules (there is a conflict re the definition of a sale and a financing versus the leases project – specifically if the leaseback has a purchase option revenue recognition rules say it is not a sale) are accounted for by removing the asset, recording the leaseback as an ROU asset and a lease liability with any gain/loss recorded upfront. Sale leasebacks that do not qualify as sales are accounted for as a financing (loan). Subleases are accounted for as a lease in (capitalized as an ROU asset and lease liability) and a lease out as either an R&R lease or an operating lease (the determining factors are not clearly defined).

Answer 66

3.2.11 What are short term leases? (p.50-51)

Question 67

Four methods/lease types are identified for lessors: * The “receivable & residual” (R&R) method is to be used for all leases of the entire asset to one lessee. This method produces results much like direct finance lease accounting for third party equipment; however, since this model does not distinguish between leases based on the significance of the assumed residual, the concept of a sales-type lease has been eliminated. The recognition of gross profit is limited to the profit on the right-of-use asset transferred, calculated by multiplying the total gross profit by the percentage derived by comparing the present value of the lease receivable to the fair value of the underlying asset. * Short-term leases may upon election be accounted for using the current GAAP operating lease method. * Investment properties (land and buildings) for qualifying real estate lessors that are investment companies use the “investment properties” method, that is, operating lease accounting with fair valuing of the leased asset, and * A “multi-lessee” exception allowing lessors in leases of investment property (commercial real estate) to use existing operating lease accounting.

Answer 67

3.2.12 What are four methods to identify lease types for lessors? (p.51)

Question 68

Proposed Transition Requirements For lessees, existing capital leases are grandfathered. All operating leases must be capitalized with a lease liability recorded equal to the present value of the remaining rents using the current incremental borrowing rate. The offsetting ROU asset is adjusted by a ratio of remaining rents to total rents and the amount of the difference between the ROU asset and lease liability is charged to retained earnings. For sale leasebacks, if the leaseback is a capital lease it is grandfathered and any gain continues to be amortized to P&L. If the sale leaseback is an operating lease the original sale leaseback assumptions must be re-evaluated under current rules possibly being re-booked as a financing or booked as an ROU lease under the lessee transition rules with any unamortized gain booked to equity. In any case, a lessee may chose full retrospective accounting for all its leases. For lessors, existing direct finance and sales-type leases are grandfathered. All operating leases are recorded as though they are new leases for their remaining term using the new lessor methods prescribed. For R&R leases the existing lease book value is derecognized and the present value of the rents is recorded. The residual is a plug where there is no gross profit in the leases. Where there is an existing gross profit in the operating lease to be capitalized details are not specified. Leveraged leases are booked as R&R leases with the rents and debt reported gross on the balance sheet.

Answer 68

3.2.13 What are some transition requirements for switching between lease types? (p.51- 52)

Question 69

With floating rate financing, base rates are set each billing cycle, based on the prevailing rates at the time. As interest rates fluctuate, so do monthly lease payments. Companies choose floating rate financing if they are comfortable with the risk of potential interest rate increases, since interest rate fees are generally lower than with fixed rate financing. Floating rate leases can often be converted to fixed rate leases, according to the lessor’s rules.

Answer 69

3.2.14 What is floating rate financing? (p.52)

Question 70

Leases with fixed rate financing set the interest rate at time of lease inception, and do not vary it throughout the lease term. The benefits of this kind of lease are that the lessee is protected against future interest rate increases, and lease payments remain constant and are easier to budget. The downside to fixed rate financing are the higher lease fees, (generally they have a larger interest adder than floating rates), and the inability to convert to floating rate financing if interest rates drop in the market. Within these types there are several debt instruments that you may be offered to set the base interest rate.

Answer 70

3.2.15 Describe fixed rate financing. (p.52)

Question 71

Lease Fees When performing a financial analysis of leasing options, there are many details that can affect your cost structure. It is important to read the fine print from each funding source when considering a lender. Not all cost items will be itemized on sample quotes, for example. You may not see some of the hidden charges until you review an actual contract. Lease fees to take note of include: * Administrative Fee * Interest Markup * Issuance Fees * Interest Rounding * Interim Interest * Interim Rent – Front end of lease * Interim Rent – Back end of lease * Fully depreciated lease admin fee – generally a flat dollar amount that is billed as long as the asset remains on the books, after it has been fully depreciated. * Variable interest rates based on conditions that may have nothing to do with leasing (for example, lease rates may spike if you cancel use of a maintenance program).

Answer 71

3.2.16 Describe the major lease fees to be aware of. (p. 53)

Question 72

From the Tax Accounting perspective, all leases fall under one of two types. The first is the True Tax Lease (or “True Lease”) where the lessor is the owner of the equipment (in regards to federal income tax purposes) and receives the tax benefits of ownership, including depreciation and tax credits. The lessee may claim the lease payment as an operating expense deduction. The second is the Non Tax Lease. With regard to tax purposes, this lease is treated as if it were a purchase or a loan. In other words, the lessee receives the same tax benefits as ownership, including claiming depreciation and interest expense deductions (but not the lease payment itself.)

Answer 72

3.2.17 What two types do leases fall under from a tax accounting perspective? (p.53)

Question 73

A lease is a Non Tax Lease if any of the following are true: * Any part of the lease payment is applied to an equity position in the asset leased. * The lessee will, by default, acquire ownership (title) of the equipment upon payment of a specified amount of “rental payments” he or she makes. * Over a short period of time the equipment is used, the total amount that a lessee pays is an exceedingly large proportion of the total sum required to outright buy the equipment. * The agreed upon payments exceed the current fair rental value. * At the time any purchase option may be exercised, the title to the equipment may be acquired for an exceedingly small purchase option price in relation to the actual value of the equipment. * Any portion of the lease payments are specifically designated as interest (or its equivalent.)

Answer 73

3.2.18 What must be true for a lease to be a non-tax lease? (p.53-54)

Question 74

To determine whether renting is a desirable option, you should consider the following: * Type of vehicle required - Regular sedans, vans and small trucks may be readily available as rentals at competitive prices. Specialty equipment or a vehicle with the proper equipment needed for the job may not be available. * Time required - Rentals are appropriate for short-term or infrequent requirements. For more common vehicle types, rentals should be considered for terms up to seven months. There are occasions when rental is appropriate for specialty equipment, where there is an infrequent requirement, such as a crane to move a piece of equipment once per year. * Cost - All rental decisions should be based on a business case analysis that considers leased, owned, employee provided, and even other options such as taxis or public transit.

Answer 74

3.3.1 What should the Fleet Manager consider when making the decision to rent or not. (p.54)

Question 75

The largest single benefit of renting over leasing or buying is that there is no long- term obligation, and in an economic downturn, renting can be an attractive and viable option. Renting is typically more expensive compared to the longer-term commitment in a buy or lease arrangement. Whether a rental is for a short or longer term, the asset belongs to the renter rather than the customer.

Answer 75

3.3.2 What is the largest benefit of renting over leasing or purchasing? (p.54)

Question 76

In general, rentals are an appropriate option within the following basic guidelines: * Replace vehicles that are being repaired or undergoing scheduled maintenance inspections, * Meet requirements during peak periods, * Meet infrequent specialty requirements, * A business case demonstrates that renting is the best option.

Answer 76

3.3.3 What are the basic guidelines for vehicle rental? (p.54)

Question 77

REIMBURSEMENT PROGRAMS There are different situations where it may not be prudent to provide a permanent vehicle to employees who drive on company business. In these instances organizations have some choices: * Rent vehicles – Generally the highest cost option, but may be appropriate in certain situations. * Operate a car sharing/pool program – A good alternative when employees with temporary needs are centrally located. * Offer nothing - If no compensation is made, employees may be able to declare the business use on their personal income tax as an unreimbursed business expense. This places a financial burden on employees, since they are not fully compensated for this expense, and it can result in the unintended consequence of increasing employee dissatisfaction and turnover for the organization. * Reimburse employees for driving personal vehicles on business - Organizations can reimburse for actual expenses, provide a cents per mile/ kilometer reimbursement for business miles driven, a flat monthly allowance, or a combination of both fixed payment and variable reimbursement. These programs will be referred to as “reimbursement” programs in this chapter.

Answer 77

3.4.1 List some alternatives to providing an employee with a permanent vehicle. (p.55)

Question 78

When Does Reimbursement Make Sense? There are certain situations where it makes sense to choose an alternative to company-provided vehicles. These situations are based mainly on usage patterns, but can also arise from financial constraints or corporate policies. If you are considering a mix of reimbursement and company provided vehicles, you need to determine the “breakeven point” and create a policy that should address: * Low Mileage Drivers – If employees` business use is sporadic or extremely low, reimbursement can be a cost effective alternative. Each business must calculate the mileage at which it is cost effective to reimburse instead of providing a company vehicle (usually up to 12,000 business miles/year range or 20,000 km). * High Employee Turnover – If the workforce is highly transient, the costs for storing, clean up, and transporting reassigned vehicles, and the administration required for these efforts, may make reimbursement a more desirable alternative than operating fleet vehicles, assuming the vehicles are not centrally located. * Temporary Drivers – Short-term assignments - someone whose business need exists on a project basis that will last less than 12 months. * New Hires – It may be cost effective to reimburse employees for driving their personal vehicle while waiting for a company vehicle to arrive, in lieu of a rental vehicle. * Startup Companies/Thinly Capitalized Companies – The organization may not have the capital funds to purchase vehicles or the revenue history to qualify for fleet leasing credit.

Answer 78

3.4.2 What should a fleet policy contain when considering a mix of reimbursement and employee provided vehicles? (p.55-56)

Question 79

Types of Reimbursement Programs There are a number of ways to design reimbursement and allowance plans, but they usually fall into one of three types: * Mileage Reimbursement ─ The organization pays employees at a specified rate per mile for business miles that are reported on a scheduled basis. * Fixed Allowance ─ The organization gives employees a fixed amount each month to cover expenses related to business driving. * Fixed and Variable Reimbursement (FAVR) - Under a FAVR plan employees receive both a fixed monthly amount, typically covering the fixed costs associated with a vehicle, and a variable reimbursement, covering the variable costs associated with a vehicle such as fuel. The variable portion is usually a cents/mile reimbursement. If this arrangement meets all IRS regulations it can be provided as a tax-free program.

Answer 79

3.4.3 What are the three types of reimbursement programs? (p.56)

Question 80

Due to adverse tax implications, some organizations have transitioned from flat allowances to non-taxable Accountable Plan allowance programs. This approach combines a flat amount (typically based on ownership costs) with a per-mile reimbursement (often derived from actual operating costs). If structured according to IRS guidelines, the allowances are non-taxable and no withholding or fringe benefit value reporting is required. Some reimbursement programs offer all drivers, regardless of territory type, location, or number of miles driven, a common reimbursement or allowance rate. On the surface, per-mile reimbursement and flat-dollar allowance approaches appear to treat all drivers fairly because treating employees equally is often perceived as synonymous with treating employees equitably. However, when employees have widely varying travel or expense patterns, they are treated inequitably under a uniform reimbursement or allowance structure.

Answer 80

3.4.4 Why have some companies switched from flat allowances to accountable plan allowance programs? (p.56)

Question 81

To promote more effective use of fleet resources, some organizations provide for dual-reimbursement rates. In a dual reimbursement structure, employees qualify for reimbursement at a higher rate (typically the IRS rate) if no organization-provided vehicles are available for/applicable to the employees’ travel needs, but receive reimbursement at a reduced rate if they decline to use vehicles provided by the organization (such as assigned, shared-use or motor pool vehicles). Organizations should consider this option if employees with significant Personally Owned Vehicles (POV) claims decline to convert to company-provided vehicles.

Answer 81

3.4.5 What is the dual reimbursement rate? (p.57)

Question 82

To be deemed non-taxable, a vehicle mileage reimbursement or allowance program must meet three criteria: * Business Connection - The costs being covered via the allowance and/or reimbursement must be incurred in connection with business purposes * Substantiation - Employee must provide information sufficient to substantiate the amount, time, place and business purpose of the expense, and * Employer Reimbursement - An allowance arrangement must require an employee to return to his or her employer within a reasonable period of time any amount paid under the arrangement in excess of the expenses substantiated.

Answer 82

3.4.6 What criteria must a vehicle mileage reimbursement plan meet in order to be deemed non-taxable? (p.57-58)

Question 83

Flat Rate per Mile IRS Standard Mileage Rate or other flat rate per mile that is reasonably calculated not to exceed the amount of the expenses or anticipated expenses Accountable Allowance Plan Periodic payments based on geographic-specific fixed and variable costs customized by driver or group formed in a uniform and objective basis that is reasonably calculated not to exceed the amount of the expenses or anticipated expenses. The allowance must be consistently applied in accordance with reasonable business practices. NAFA’s Financial Management Guide

Answer 83

3.4.7 What are the two tax free programs in the US? (p.58)

Question 84

IRS Standard Mileage Rate Many organizations use the IRS mileage rate, because employers perceive it as easy, tax-exempt and defensible. In reality, the Standard Mileage Rate is intended to be a deduction guideline for taxpayers who opt for a standard deduction in lieu of tracking business vehicle expenses diligently. The rate is derived from weighting and blending cost factors from across the U.S. It is not representative of vehicle ownership and operating costs for any specific vehicle in any specific geographic area of the country. Some vehicle costs (e.g., insurance, financing, fuel, vehicle registration, and vehicle sales taxes) vary substantially by geographic area and can drive a vehicle’s ownership and operating costs from $6,000 in a low-cost area like Sioux Falls to upwards of $12,000 in locations with particularly high insurance costs, such as Boston or Detroit. Therefore, depending on the types of vehicles driven and where employees are driving, the true per-mile ownership and operating costs for employees’ vehicles actually may be higher than the IRS rate, particularly when fuel costs are volatile. The standard mileage rates for business, medical and moving purposes are based on an annual study of the fixed and variable costs of operating an automobile. The IRS Standard rate can be found in IRS Pub 463. This rate is typically updated each year. However, there have been times when the rate was revised mid-year.

Answer 84

3.4.8 What is the IRS standard mileage rate? (p.58)

Question 85

Accountable Plan The IRS provides broad guidelines for calculating and documenting non-taxable vehicle allowances and reimbursements to substantiate “amount, time, place and business purpose of expenses.” The Accountable Plan must be based on geographic- specific fixed and variable costs customized by driver or group and paid periodically. For an allowance to qualify as non-taxable to employees (commonly referred to as an accountable plan) the allowance must be: * Reasonably calculated, not to exceed the amount of the expenses or the anticipated expenses; and * Provided on a uniform and objective basis with respect to expenses; and * Periodically paid at a rate that combines a fixed rate and a variable rate; and * Be consistently applied in accordance with reasonable business practices.

Answer 85

3.4.9 What criteria must an allowance plan meet in order for it to be non-taxable to the employee? (p.58-59)

Question 86

Fixed and Variable Rate Allowance FAVR A fixed and variable rate allowance plan (commonly referred to as a FAVR) is an accountable plan that is essentially an IRS-supplied template for calculating and documenting vehicle allowances and reimbursements. FAVR guidelines include 21 data, program, and driver tests, which all must be met for the approach to be considered FAVR compliant.”

Answer 86

3.4.10 What is a fixed and variable rate allowance plan? (p.59)

Question 87

The basis for developing a FAVR-compliance plan is the same as a Non-taxable Accountable Plan, but the IRS provides specific guidelines, such as: * Data - Must be derived from base locality, reflect retail prices, and be reasonable as well as statistically defensible in approximating costs of standard vehicles. Most data elements have specific requirements. * Insurance - Employees must maintain vehicle insurance consistent with levels used in deriving allowance amount. * Vehicle Age - Age of employees’ vehicles must not exceed depreciation schedule used to derive amount of the allowance. * Vehicle Value - Cost for a calendar year may not exceed 95% of retail dealer invoice plus state and local sales or use taxes up to $28,000 for automobiles, or $29,300 for trucks and vans. * Minimum Mileage - 5,000 annual business miles (80% of 6,250) * Business Use Percentage - Annual business mileage may not exceed 75% * Enrollment - At least five employees in the program * Management Employee Enrollment - Cannot exceed 50% of program enrollees at any time during the calendar year and enrollee cannot be a controlling employee of the corporation.

Answer 87

3.4.11What are the guidelines provided by the IRS in order to help develop a FAVR compliance plan? (p.59)

Answer 88

3.4.12Compare a FAVR compliant plan with a non-FAVR accountable plan. (p.59-61)

Question 89

Administrative Tasks for Both FAVR and Non-FAVR Allowances In the case of both FAVR and Non-FAVR plans, certain administrative tasks must be performed: * Identify qualifying drivers (FAVR) or assign driver tiers by miles and/or job (non-FAVR); * Determine vehicle standards; * Collect driver information, proof of license and insurance, validation of vehicle make/model and purchase price/value; and * Verify driver-provided info (e.g., review registrations, compare against databases).

Answer 89

3.4.13What administrative tasks must be completed for both FAVR and non-FAVR plans? (p.62)

Question 90

Because of the purchasing power afforded most organizations, operating fleet vehicles is nearly always more cost effective than alternative reimbursement programs. According to Automotive Fleet’s Fact Book Guide for 2011 – 2012, the average cost per mile for an intermediate car in a fleet program, runs from $0.2738 to $0.3076, depending on the model type and regional distribution. By comparison, the IRS business standard mileage rate for reimbursement stands was $0.51 for the first half of 2011, and $0.555 per mile for the last six months of 2011 and remained the rate for 2012.

Answer 90

3.4.14 Why is reimbursement often more costly than other transportation options? (p.62)

Question 91

Liability It is important to understand that a reimbursement program does not eliminate an organization’s risk of liability. This is because of the legal concept of vicarious liability, which holds an employer of an employee who injures someone through negligence while in the scope of employment (doing work for the employer) liable for damages to the injured person. The risk evaluation and mitigation that you would perform for fleet vehicles should also be performed for personal vehicles driven on company business. This would include, but is not limited to: * Checking employee motor vehicle records NAFA’s Financial Management Guide* Providing driver training to employees who drive on business * Requiring adherence to all company safety standards and policies Another consideration is employee safety. Employees can be one of an organization’s most valuable assets.

Answer 91

3.4.15 What are some liability issues involved in reimbursing employees for personal vehicle use? (p.62-63)

Question 92

There are pluses and minuses to reimbursement programs from the employee’s perspective. On the plus side, employees have the freedom to choose their own vehicle, and the reimbursement program may allow them to afford a higher end vehicle they may not be able to finance in their personal budget. The downside is that reimbursement programs may under-compensate employees for business driving. One industry study found that employees over-report business miles by as much as 32% to make up for what they perceive as a shortfall in compensation for vehicle expenses. With reimbursement programs, documentation of business use, maintaining receipts, searching for and acquiring new vehicles, maintaining licensing compliance, managing maintenance repairs and managing crash repairs are some activities for which drivers are responsible. A certain portion of these activities will be performed during working hours and thus decrease employee productivity.

Answer 92

3.4.16 What are the advantages and disadvantages of a reimbursement program to the employees? (p.63)

Question 93

Organizational Image Controlling the type, condition and appearance of vehicles used for work is an important part of the organization’s image presented to customers and the community. Companies can mark vehicles with logos or other identifying items for marketing purposes and standardize models and colors to reflect organizational image. They also can ensure that proper maintenance and prompt repair of crash damage is performed, protecting the organizational image reflected by the employee when visiting customers. If the organization is concerned with its environmental impact, this adds another consideration to the decision regarding company vehicles. Fleet programs enable companies to exert some control over greenhouse gas emissions through vehicle selection. Some fleets have capitalized on the public relations opportunity presented by operating a fleet of alternative-fuel vehicles and branding them to relate this to the public. Companies have little to no control over the environmental impact of employees’ personal vehicles.

Answer 93

3.4.17 How might vehicle choice and reimbursement programs affect a company’s image? (p.63)

Question 94

Pros * Short-term temporary requirements * Replace need or reduce size of motor pool * Employee satisfaction (e.g., vehicle preference) * May be tax free to employee *May reduce corporate risk during personal use time Cons * Costs based on retail rather than wholesale market * Vehicle may not serve functional purpose * Employee dissatisfaction (e.g. reimbursement doesn’t cover all business-related expenses) * May increase tax liability for employer * Less control over vehicle operating condition * Can be difficult to verify accuracy of mileage submitted * Less control over safety features Less control over insurance coverage * Competitive marketplace (i.e., competitors offer company vehicles) * Less control over vehicle/corporate image

Answer 94

3.4.18 List the pros and cons of a vehicle reimbursement program. (p.64)

Question 95

An allowance is any payment that employees receive from an employer for using their own vehicle in connection with or in the course of their employment, without having to account for its use. This payment is in addition to their salary or wages. An allowance is taxable unless it is based on a reasonable per-kilometer rate.

Answer 95

3.4.19 Define the term allowance. (p.64)

Question 96

When employees are provided with vehicles or give allowances with the understanding they would then use their own vehicles, the employees may be in receipt of a taxable benefit. However, there are many complexities associated with the benefit or allowance. Refer to the following questions for clarification: * What is and what is not an automobile? * When does a benefit arise (the personal use)? * How do you calculate the benefit for employer provided automobiles and other vehicles? * How do you calculate the allowance you give to your employee for using his or her own automobile or other vehicle? If the employee does not use the vehicle for personal driving, there is no taxable benefit, even if the vehicle was available to the employee for the entire year.

Answer 96

3.4.20 What questions can be used to clarify if something is an allowance or taxable benefit in Canada? (p.64-65)

Question 97

An allowance is generally considered to be reasonable if all the following conditions apply: * The allowance is based only on the number of business kilometers driven in a year. * The rate per-kilometer is reasonable. * The employee has not otherwise been reimbursed for expenses related to the same use of the vehicle. This does not apply to situations where the employer reimburses an employee for toll or ferry charges or supplementary business insurance, if the allowance has been determined without including these reimbursements. When employees complete their income tax and benefit return, they do not include this allowance in income.

Answer 97

3.4.21 What conditions must apply for an allowance to be deemed reasonable in Canada? (p.65)

Answer 98

3.4.22 What is averaging allowances? (p.66)

Question 99

Employees’ allowable employment expenses An employee may be able to claim certain employment expenses on his or her income tax and benefit return if, under the contract of employment, the employee had to pay for the expenses in question. This contract of employment does not have to be in writing, but both parties must agree to the terms and understand what is expected. For example, if an employee is allowed to use his personal motor vehicle for business and is paid a monthly motor vehicle allowance to account for the operating expenses, they would then be included in the employee’s employment income as a taxable benefit. If the allowance is taxable, it is also pensionable and insurable. CPP contributions, EI premiums, and income tax should be deducted. GST/HST should not be included in the value of this allowance. If an employee is paid an allowance based on a flat rate that is not related to the number of kilometers driven, it is a taxable benefit and has to be included in the employee’s income. Employees may be able to claim allowable employment expenses on their return. If an employee is paid an allowance that is a combination of flat rate and reasonable per-kilometer allowances that cover the same use for the vehicle, the total combined allowance is a taxable benefit and has to be included in the employee’s income. For example, an employer may pay an allowance to employees as follows: * A flat per-diem rate to offset the employee’s fixed expenses for each day the vehicle is required; and * A reasonable per-kilometer rate for each kilometer driven to offset the operating expenses. The flat per-diem rate compensates the employee for some of the same use on which the reasonable per-kilometer allowance is based. That is, the fixed expenses incurred by the employee to operate the vehicle.

Answer 99

3.4.23 What are some of the expenses that an employee can claim on their income tax and benefit return? (p.66-67)

Answer 100

3.4.24 What are some strategies for employers who pay their employees automobile expenses? (p.67)

Question 101

A comprehensive fleet management strategy requires optimizing use of all viable transportation alternatives, including permanently assigned vehicles, short-term rentals from motor pools, commercial rentals/mini-leases, POV reimbursements or allowances, and other forms of transportation (e.g., taxi, airline, mass transit). To balance use of transportation alternatives effectively, the organization and its traveling employees must be able to identify and compare the costs and benefits of various options prior to making travel decisions. Breakeven analyses (BEAs) models can help assess transportation cost-effectiveness for single trips or for forecasted monthly or annual travel

Answer 101

3.5.1 What does a comprehensive fleet strategy require? (p.68)

Question 102

Some of the options to explore include: * Motor pools – Fleet vehicles centrally located which are shared by employees * Car sharing services – Companies such as Zipcar offer vehicles strategically located throughout metropolitan areas to members who make reservations through a website. These companies may also work with you to develop an onsite solution should reservation volume warrant it. * Public transportation – Taxis, buses, trains are all transportation options to be considered. * Car rental – On a temporary basis, this can be an effective transportation alternative. * Virtual Meetings – As the costs for video conferencing continue to decline, organizations are expanding use of this technology to minimize travel. This can be especially effective in eliminating repetitive commutes between locations, for instance, for monthly business meetings where attendees drive to a central location.

Answer 102

3.5.2 List some transportation options to consider. (p.68)

Question 103

* Governing Body * Exemptions * Fair Market Value * Rules and Rates Used for Calculation * Commuting/On-call

Answer 103

4.1.1 What are some of the main differences between Canada and the US? (p.70)

Question 104

De Minimis Use - Use that is minimal or incidental in nature, would have little value to an employee, and would be unreasonable and administratively impracticable to account for. The value of any de minimis transportation benefit provided to an employee may be excluded from the employee’s wages. Qualified Commuter Highway Vehicle - This exclusion applies to a ride in a commuter highway vehicle (i.e., vanpool) between the employee’s home and work place. Generally, the employer can exclude qualified transportation fringe benefits from an employee’s wages, even if provided to the employee in place of pay. A commuter highway vehicle is any highway vehicle that seats at least six adults (not including the driver). In addition, the employer must reasonably expect that at least 80 percent of the vehicle mileage will be for transporting employees between their homes and work place with employees occupying at least one-half the vehicle’s seats (not including the driver’s). Qualified Non-personal-use Vehicles - A qualified non-personal use vehicle is any vehicle the employee is not likely to use more than minimally for personal purposes because of its design. Qualified non-personal-use vehicles generally include all of the following vehicles. De minimis (minimal) use * Qualified transportation commuter highway vehicle between employee’s home and work place * Qualified non-personal use vehicles

Answer 104

4.1.2 What are the three exemptions from personal use fringe benefits? (p.70)

Question 105

Qualified Non-personal-use Vehicles - A qualified non-personal use vehicle is any vehicle the employee is not likely to use more than minimally for personal purposes because of its design. Qualified non-personal-use vehicles generally include all of the following vehicles. * Clearly marked, through painted insignia or words, police, fire, and public safety vehicles (government license plates alone do not qualify) * Unmarked vehicles used by law enforcement officers if the use is officially authorized by the Federal, State, county, or local governmental agency or department that owns or leases the vehicle and employs the officer, and must be incident to law-enforcement functions, such as being able to report directly from home to a stakeout or surveillance site, or to an emergency situation. Use of an unmarked vehicle for vacation or recreation trips cannot qualify as an authorized use. * An ambulance or hearse used for its specific purpose. * Any vehicle designed to carry cargo with a loaded gross vehicle weight over 14,000 pounds. * Delivery trucks with seating for the driver only, or the driver plus a folding jump seat. * A passenger bus with a capacity of at least 20 passengers used for its specific purpose. * School buses. * Tractors and other special-purpose farm vehicles. * Bucket trucks, cement mixers, combines, cranes and derricks, dump trucks (including garbage trucks), flatbed trucks, forklifts, qualified moving vans, qualified specialized utility repair trucks, and refrigerated trucks * Qualified Moving Van, means any truck or van used by a professional moving company in the trade or business of moving household or business goods if personal use of the van is not allowed, other than for travel to and from a move site (or de minimis) and the specific move site is an irregular practice (i.e., not more than five times a month on average), and personal use is limited to situations in which it is more convenient to the employer, because of the location of the employee’s residence in relation to the location of the move site, for the van not to be returned to the employer’s business location. * Qualified Specialized Utility Repair Truck is specifically designed to carry heavy tools and testing equipment or parts if the shelves, racks, or other permanent interior construction is such that it is unlikely that the truck will be used more than a de minimis amount for personal purposes, and the employer requires the employee to drive the truck home in order to be able to respond in emergency situations for purposes of restoring or maintaining electricity, gas, telephone, water, sewer, or steam utility services. Vans and pickups do not qualify under utility repair truck exclusion. * A pickup truck with a loaded gross vehicle weight of 14,000 pounds or less is a qualified non-personal-use vehicle if it has been specially modified so it is not likely to be used more than minimally for personal purposes. For example, a pickup truck qualifies if it is clearly marked with permanently affixed decals, special painting, or other advertising associated with a trade, business, or function and meets either of the following two requirements: o It is equipped with at least one of the following: 1) a hydraulic lift gate; 2) permanent tanks or drums; 3) permanent side boards or panels that materially raise the level of the sides of the truck bed; 4) other heavy equipment (such as an electric generator, welder, boom, or crane used to tow automobiles and other vehicles); or o It is used primarily to transport a particular type of load (other than over the public highways) in a construction, manufacturing, processing, farming, mining, drilling, timbering, or other similar operation for which it was specially designed or significantly modified. * A van with a loaded gross vehicle weight of 14,000 pounds or less is a qualified non-personal-use vehicle if it has been specially modified so it is not likely to be used more than minimally for personal purposes. For example, a van qualifies if it is clearly marked with permanently affixed decals, special painting, or other advertising associated with a trade, business, or function andhas a seat for the driver only (or the driver and one other person) and either of the following items. o Permanent shelving that fills most of the cargo area; or o An open cargo area and consistently transports merchandise, material, or equipment used in the employer’s trade, business, or function.

Answer 105

4.1.3 What vehicles are considered non-personal-use vehicles? (p.71-72)

Answer 106

4.1.4 What is the General Valuation Rule for calculating personal use? (p.73-74)

Question 107

Safe-harbor Value Rules So-called safe harbors are alternatives to the General Valuation Rule and include methods such as the Annual Lease Value, Cents-Per-Mile, Commuting, etc. Employers follow the IRS-approved step-by-step process rather than complying with the terms of the General Rule. The safe harbor fulfills federal requirements only IF applied correctly. The IRS provides several Safe-harbor Value Rules that are limited, for some vehicles, based on the vehicle FMV, the driver, and/or the type of use. These rules include: * Cents-Per-Mile * Commuting * Annual Lease Value Rule Cents-Per-Mile Rule. Under this rule, the employer determines the value of a vehicle provided to an employee for personal use by multiplying the standard mileage rate by the total miles the employee drives the vehicle for personal purposes. Personal use is any use of the vehicle other than use in the employer’s trade or business. This amount must be included in the employee’s wages or reimbursed by the employee.

Answer 107

4.1.5 What are Safe-harbor Value Rules? (p.74-75)

Question 108

Fleet-Average Valuation Rule. An employer with a fleet of 20 or more passenger automobiles, vans, or trucks may determine the value of the personal use by using the Fleet-Average Valuation Rule to calculate the Annual Lease Value. Rather than calculating an individual FMV for each vehicle, the employer averages FMVs less than the annual FMV threshold limits set by the IRS. The employer must average all eligible passenger automobile FMVs separately from all eligible truck and van FMVs and, thus, uses two FMVs when calculating the Annual Lease Value fringe benefit for each vehicle type. The Fleet-Average Valuation rule may not be used if the FMV exceeds annual IRS thresholds.

Answer 108

4.1.6 Describe the Fleet Average Valuation Rule. (p.74)

Question 109

4.1.7 Define the Cents-per-mile Safe-harbor Rule. (p.74-75)

Question 110

4.1.8 What consistency requirements must be met when using the Cents-per-mile Rule? (p.75)

Question 111

4.1.9 What is the Commuting Rule, and what requirements must be met to use it? (p.75-76)

Question 112

Annual Lease Value Rule. Under this rule, the employer determines the value of a vehicle provided to an employee by using its Annual Lease Value. For a vehicle provided only part of the year, the employer can use either the vehicle’s prorated annual lease value, or its daily lease value. Employers must begin using this rule on the first day the vehicle is made available to any employee for personal use and must continue to use this rule for a replacement vehicle to the employee if the primary reason for the replacement is to reduce federal taxes. The following consistency requirements and exceptions should be noted: * Employers must use this rule for all later years in which the vehicle is made available to any employee unless the vehicle qualifies for use under the Commuting Rule during any year. * Employers can change to the Lease Value Rule on the first day for which the employer does not use the Commuting Rule. * Employers can change to the Lease Value Rule on the first day on which the vehicle no longer qualifies for the Cents-per-Mile Rule.

Answer 112

4.1.10 What is the Annual Lease Value Rule? (p.76)

Question 113

FMV Valuation Term. The Annual Lease Values in the IRS table are based on a four-year lease term. These values will generally stay the same for the period that begins with the first date the employer uses this rule for the vehicle and ends on December 31 of the fourth full calendar year following that date. For each later four-year period the employer calculates a new Annual Lease Value by determining the FMV of the vehicle on January 1 (or November 1 if the Special Accounting Rule is used) of the first year of the later four-year period, and selecting the amount in the table that corresponds to the appropriate dollar range in column.

Answer 113

4.1.11 What must be calculated in order to use the Annual Lease Value Rule? (p.77)

Question 114

Prorated Annual Lease Value. If a vehicle is provided to an employee for a continuous period of 30 or more days, but less than an entire calendar year, the Prorated Annual Lease Value is calculated by multiplying the Annual Lease Value by a fraction, using the number of days of availability as the numerator and 365 as the denominator. If a vehicle is unavailable to the employee because of his or her personal reasons (for example, if the employee is on vacation), the employer cannot take into account the periods of unavailability when using a Prorated Annual Lease Value. An employer cannot use a Prorated Annual Lease Value if the reduction of federal tax is the main reason for doing so.

Answer 114

4.1.12 What is the Prorated Annual Lease Value? (p.77)

Question 115

Daily Lease Value. If the employer provides a vehicle to an employee for a continuous period of less than 30 days, the employer may use the Daily Lease Value to figure its value. The Daily Lease Value is calculated by multiplying the Annual Lease Value by a fraction, using four times the number of days of availability as the numerator and 365 as the denominator. The employer can apply a Prorated Lease Value for a period of continuous availability of less than 30 days by treating the vehicle as if it had been available for 30 days, if it would result in a lower valuation than applying the Daily Lease Value to the shorter period of availability.

Answer 115

4.1.13 How is the daily lease value calculated? (p.77)

Question 116

Employer and Employee Responsibilities The employer may rely on adequate records maintained by the employee or on the employee’s own statement if corroborated by other sufficient evidence unless the employer knows (or has reason to know) that the statement, records, or other evidence are not accurate. The employer must retain a copy of the adequate records maintained by the employee or the other sufficient evidence, if available. Alternatively, the employer may rely on a statement submitted by the employee that provides sufficient information to allow the employer to determine the business use of the vehicle unless the employer knows (or has reason to know) that the statement is not based on adequate records or on the employee’s own statement corroborated by other sufficient evidence. If the employer relies on the employee’s statement, the employer must retain only a copy of the statement. The employee must retain a copy of the adequate records or other evidence. The employee must account to the employer for the business use of the vehicle. The employee may elect to substantiate usage using mileage, for example, the time and place of the travel, and the business purpose of the travel. Written records made at the time of each business use is the best evidence; however, non-contemporaneous recording is not mandatory. Any use that is not substantiated as business use is personal use. Generally, an adequate record must be written. However, a record of the business use prepared in a computer memory device with the aid of a logging program will constitute an adequate record.

Answer 116

4.1.14 What are employee and employer responsibilities for record keeping? (p.78)

Question 117

Exemptions from Recordkeeping Recordkeeping is not required if the employer’s written policy prohibits personal use (other and de minimis) and the vehicle is garaged at the employer’s facility or is used for bona fide non-compensatory business reasons to commute to/from the employee’s home, and is parked at the employee’s home. Exemptions are not permitted for chauffeur driven vehicles, and are not allowed for officers or more than one percent owner.

Answer 117

4.1.15 When is record keeping not required? (p.78)

Question 118

Treatment of Personal Use Fringe Benefit There are three ways that employers can meet the IRS requirements for treatment of the personal use fringe benefit: * The least-common method is to treat all miles as personal use and force the employee to deduct expenses from the employee’s tax return. This method can result in overpayment of FICA and unemployment taxes and can only be used in conjunction with the Lease Value Rule method to value the benefit. Some employers treat all miles as personal use if the employee fails to report business use by the required due date. * The second method is to impute income for the personal use miles determined by calculating the difference between starting and ending odometers and subtracting business miles. * Another method requires the employee to pay the employer for the value of personal use. Under this scenario, the employer is reducing the amount of business expense that is ultimately written off for tax purposes.

Answer 118

4.1.16 What are the three methods that employers can use to meet the IRS requirements of personal use fringe benefits? (p.79)

Question 119

CANADA REVENUE AGENCY REGULATIONS The Canada Revenue Agency (CRA) personal use tax regulations apply to motor vehicles, meaning automotive vehicles designed or adapted for use on highways and streets. It does not include a trolley bus or a vehicle designed or adapted for use only on rails. The term “vehicle” includes both automobiles and motor vehicles not defined as an automobile. Therefore, although an automobile is a kind of motor vehicle, Canada treats automobiles differently for tax purposes The CRA publication T4002, Business and Professional Income, illustrates when a motor vehicle is or is not a passenger vehicle. A copy of the table from this publication is provided below:

Answer 119

4.2.1 What vehicles do the CRA personal use tax regulations apply to? (p.79-80)

Answer 120

4.2.2 What is a Standby Charge and how is it calculated? (p.81)

Question 121

An operating cost benefit is included in the employee’s income when the employer pays operating costs that relate to personal use of an employer-provided automobile. The calculation of the operating cost benefit is provided below: Personal kilometers driven in the year tines(X) Current per-kilometer rate

Answer 121

4.2.3 What is Operating Cost Benefit and how is it calculated? (p.82)

Question 122

Vans, pickup trucks, and similar vehicles that seat no more than three persons including the driver are exempt from the deductibility restrictions applicable to automobiles (i.e., standby and operating calculation methodology) if their use is “primarily” (i.e., more than 50 percent) for the transport of goods, equipment and/ or passengers in the year of acquisition meets relevant benchmarks. This can be increased in certain cases to include extended cab pickups at work sites, and in cases where the driving is all or substantially all for the transportation of goods or passengers in the course of a business activity.

Answer 122

4.2.4 What vehicles are exempt from the deductibles stated above? (p.82)

Question 123

On-call Employees On-call employees may be taxed at the current operating cost benefit rate (e.g., $0.26/km for 2012) IF the employer has documented in a published manual (e.g., policy) and if all of the following four conditions are met: * The motor vehicle is especially designed or significantly modified to carry tools, equipment or merchandise for the business or trade and is essential in a fundamental way for the performance of the employment duties. * The motor vehicle is suited for and consistently used to carry and store heavy, bulky or numerous tools and equipment and is essential in a fundamental way for the performance of the employment duties, e.g. pick-up trucks and vans. The tools and equipment contemplated are those of a nature that cannot easily be loaded and unloaded from the vehicle, and exclude tools and equipment such as office supplies, work documents, laptops, and personal travel items. * The motor vehicle is used on a regular basis to carry material that is noxious and malodorous, such as veterinary samples or fish and game, or * The employee is on-call for emergencies as described above, the motor vehicle is a clearly marked emergency-response vehicle, or specially equipped so as to provide for rapid response, or for the purposes of carrying specialized equipment to the scene of the emergency. When calculating the benefit, the CRA will not consider the use of the motor vehicle to be personal if the employee proceeds directly from home to a point of call (e.g. scene of emergency) or returns home from that point of call. In other words, the point of call is not the employee’s regular place of business.

Answer 123

4.2.5 What conditions must be met for an employee to be an on-call employee? (p.82- 83)

Question 124

Personal use reporting With respect to logbooks and sufficient backup evidence, generally, as the percentage of business use and the related expense claims increase, more documentation is expected (by CRA) to be available. Businesses can choose to maintain a full logbook for one complete year to establish the business use of a vehicle in a base year. After one complete year of keeping a logbook to establish a base year, a three- month sample logbook can be used to extrapolate business use for the entire year, providing the usage is within the same range (within 10 percent) of the results of the base year. Businesses will need to demonstrate that the use of the vehicle in the base year remains representative of its normal use.

Answer 124

4.2.6 What must be documented in regards to personal use? (p.83)

Question 125

f he took the same five vehicles and considered not only the acquisition cost, but the cost of fuel over the vehicle’s life, its lifetime maintenance and repair costs, and its resale value, he may find that the vehicle with the lowest cost is not the most cost-effective over the long-term use in the fleet.

Answer 125

5.1.1 What are some considerations to make when acquiring new vehicles? (p.85)

Question 126

Besides figuring out which vehicle would be the most cost-effective to place in a fleet, a lifecycle analysis can also be used to: * Determine Replacement Times – While a lifecycle model can help pinpoint which vehicle to place in a fleet, it can also reveal the optimum time to get rid of it, based on various factors and costs. * Lease vs. Buy – For many companies, purchasing a vehicle may not be the most effective way to acquire the vehicle. A lifecycle model can compare the overall costs of owning versus leasing a vehicle, thereby showing the optimum decision for a particular set of circumstances. * Employer vs. Employee Provided – Some companies provide a vehicle to their employee in order for the employee to do their job. Other companies reimburse an employee for the use of their personal vehicle. Which is more effective, or the best cost option? A lifecycle analysis can show which option is better for the company or for the employee over time. * Alternate Fuels – Is placing a CNG truck in a fleet cost effective? Or would an electric vehicle make more sense? A lifecycle model can compare the options and give you a better picture as to which one may give a greater return on investment. * In-House vs. Outsourcing – Maintaining a vehicle is expensive. For some, having a garage where the vehicles can be maintained is more costly than if the work is outsourced to companies that specialize in this function. Lifecycle analyses can determine if having a garage and its associated costs is better or worse than outsourcing all work.

Answer 126

5.1.2 What can a lifecycle analysis be used for? (p.86)

Question 127

Depreciation, or the value of the asset consumed during its use, is by far the largest vehicle expense. NAFA defines depreciation in equation form as: Net Acquisition Cost (purchase price plus cost to place into service), MINUS Net Remarketing Revenue (resale price minus cost to remove from service and sell)

Answer 127

5.1.3 What is the formula for depreciation? (p.86)

Question 128

There are a number of reasons why a lifecycle cost analysis may not work for an organization. However, if the fleet manager knows the common mistakes when developing the analysis, he/she can avoid all the headaches in trying to ascertain why a model does not give the answer anticipated. Some of these common mistakes are: * Omission of necessary data * Lack of a systemic structure or analysis * Misinterpretation of data * Wrong or misused estimating techniques * A concentration on wrong or insignificant facts * Failure to check all calculations * Estimation of the wrong items * Using incorrect or inconsistent escalation data

Answer 128

5.1.4 List some common mistakes to be avoided when doing a Lifecycle Cost Analysis. (p.87)

Question 129

Many times, the lifecycle analysis is not questioned, but the source data is. The more that one can demonstrate that the data came from historical information or from recognized authorities, the more credibility the model will have. Also, any assumptions made must be clearly stated to ensure credibility later if things do not go exactly as expected.

Answer 129

5.1.5 What are some factors that may affect the credibility of an LCA? (p.87)

Question 130

LCA – FINANCIAL COMPARISON TO ACQUIRE VEHICLES When trying to make a decision between two vehicles to place into a fleet, there are a number of items that need to be determined before an analysis can be done. These are items that apply to the fleet in question and to policy decisions made by the company. * Target Months in Service – usually set by company policy, this is the number of months the company expects to keep the vehicle. * Target Replacement Mileage – also set by company policy, this is the amount of miles the vehicle will be driven before being replaced. * Expected Mileage Per Month – either based on historical data on all drivers or by company expectations for the employee, this is the number of miles being driven per month. * Lease Annual Interest Rate – if leasing a vehicle, the annual lease rate. Note that this value may also come from an internal cost of money rate or a return on investment target, if an organization supplies the funds from its own resources. Some fleets might have to consider a return on investment (ROI) of over 20%, reflecting the potential income from funds invested in manufacturing capacity or marketing efforts. For public sector organizations, this rate may be the return paid on bonds issued or even the rate of return on taxes that are invested between the time they are collected and then spent on operations. * Lease Management Fee – leasing companies charge a management fee (either a percentage or flat rate). Government entities may charge a management fee to each department if Fleet Services handles the vehicle management. * Book Depreciation Rate - a negotiated amount that will be included in the monthly lease rate to cover the anticipated cost of depreciation. A rate of 2% would fully depreciate a vehicle on a straight-line basis in 50 months. * Cost of Fuel Per Gallon – average cost at the time the model is completed. * Estimated Personal Use – percentage of use of the vehicle that the employee uses for personal reasons. If a company collects the value of personal use from the employee (check or payroll deduction) then the percentage is used in a lifecycle model. If the company only taxes the employee on the use benefit, then considering personal use in a model is redundant. * Daily Bridge Rental Rate – cost of a rental vehicle if the new vehicle is not received and the old vehicle is already sold

Answer 130

5.2.1 What items need to be determined before an analysis can be done? (p.88)

Question 131

If a manager knows the target months in service, target replacement mileage and expected mileage per month, he can easily determine if company policy needs to be adjusted.

Answer 131

5.2.2 What does the Fleet Manager need to know in order to determine if company policy must be changed? (p.89)

Answer 132

5.2.3 How might the Fleet Manager determine the resale price of a vehicle? (p.89)

Question 133

Monthly interest can be figured as the annual interest rate divided by 12 (7.85% / 12).

Answer 133

5.2.4 What methods can the Fleet Manager use to calculate interest? (p.89)

Question 134

Next, figure the fixed costs for each of the three vehicles being considered. The most important fixed cost is depreciation. Depreciation is the difference between the acquisition cost and the resale price. It can also be considered as the cost of the vehicle consumed in use. Normally, when considering which vehicle to place in a fleet, an acquisition cost may be known, but a resale price for the vehicle may not be known. If this is the case, than a resale price may be derived from several methods. One might be to look at older models of the same vehicle and find out what they sold for based on age and mileage. Another way might be to look at auction figures for older or comparable models. Whatever method is used to ascertain the resale price, it should always be noted that this is a projected resale price since no one can see into the future. Next, interest (or cost of money) needs to be determined for the entire time the vehicle is in service. A simple method of determining interest would be to use a step-rate formula. This formula would calculate interest (or cost of money) on a yearly basis, with adjustments for any months in a year the vehicle is not in the fleet. Many companies and government entities use either an investment rate for money or a return on investment rate as the basis for calculating the interest. These entities usually buy vehicles outright, so they are using money for vehicles. Using a return on investment rate, or the rate they would be making on money if they invested it, makes sense since the money was used in a purchase instead of an investment. For those entities that lease their vehicles, they may use the interest rate the leasing company is charging them for the lease. Another fixed cost is a management fee. This is either the management fee the leasing company may charge, or the management fee the fleet may charge to its customers if the fleet operates as an internal service fund. Insurance should be considered a fixed cost, but only if insurance is calculated per vehicle. If the entity is self-insured, or if all vehicles are allocated insurance costs equally, then insurance should not be considered, as it will have no bearing on the final outcome of the analysis. If the vehicles being considered for the fleet have different delivery times, then consideration needs to be given to the fact that a rental vehicle may need to be employed over the lowest delivery option. As an example, if a vehicle can be delivered in 30 days and another in 60 days, then the vehicle being delivered in 60 days would need a 30-day rental over the lowest delivery option of 30 days. If a company also receives tax incentives or any rebate checks on vehicle purchases, the credits the company receives have to be removed from the fixed costs. They cannot be applied to the acquisition cost since the money was received after the vehicle was purchased.

Answer 134

5.2.5 What fixed costs should be considered during the LCA? (p.90)

Question 135

Operating costs can be separated into two sections: fuel and repairs/maintenance. For fuel, it is easy to calculate fuel costs a vehicle may have over its lifetime. If a vehicle is scheduled to be replaced at 83,600 miles, the vehicle gets 20 miles-per- gallon, and fuel is $2.00 per gallon, then the estimated fuel costs over the life of the vehicle is: (83,600 / 20) x $2.00 = $8,360.00 Repair and maintenance costs are a little harder to calculate. Many fleets have average repair costs over the life of the fleet that they may be able to use. Many leasing companies have data on the cents-per-mile cost of many vehicles and even the manufacturer may have an estimated lifetime repair/maintenance cost. Given cents-per-mile information (as an example, $0.14 cents-per-mile), then the estimated maintenance cost over the life of the vehicle would be: 83,600 x $0.14 = $11,704.00

Answer 135

5.2.6 What are the two sections that operating cost can be split into and how are they calculated? (p.91)

Question 136

If a company allows personal use and taxes an employee on the benefit of the use, then personal use should not be considered in an analysis. Why? Because the company does not recoup the costs of personal use. Instead, the company allows the employee to use the vehicle at his or her own expense and taxes them on the value of the use. If a company does recoup the personal use cost of the vehicle, then this should be considered, as the company offsets the full lifecycle value of the vehicle by an employee’s contribution to its maintenance and upkeep. Personal use is calculated against both fixed and operating costs. If an employee drives 20% of the time for personal use, then 20% of the fixed and 20% of the operating costs of the vehicle over its life are attributable to the employee’s use.

Answer 136

5.2.7 How is personal use factored into the LCA? (p.92)

Question 137

Dividing a total lifecycle cost by the number of miles a vehicle is being driven would give a lifecycle cents-per-mile. Many entities use the cents-per-mile information as a basis for the vehicle selection, while others use the bottom line total cost. Either way, choosing the lowest cost option after ALL factors have been considered is the most effective way to determine optimum vehicle selection.

Answer 137

5.2.8 How can you determine the lifecycle costs-per-mile? (p.92)

Question 138

When looking at setting up a lifecycle model to determine replacement of a vehicle, several factors need to be considered. One is extending the replacement, as there are some definite benefits to keeping vehicles in service longer. Since depreciation is higher in the first couple of years of a vehicle’s life, spreading that peak cost out over lower depreciation years reduces the cost of depreciation per month, per year. Remember, depreciation is the largest category of vehicle expense, so this becomes important in the analysis. We can temporarily avoid vehicle price increases. Keeping older vehicles reduces the amount of money an organization has tied up in these assets. This can be an important element in fiscal matters such as tax rates, stock valuation and even bond ratings for public entities. Of course, totaling a $1,000 pickup in a collision is less costly than totaling a $10,000 pickup. But, there is a downside to keeping older vehicles. We expect higher maintenance and downtime for older vehicles. Replacing a fleet at longer intervals means that it takes longer to switch over to new technologies. Those technologies make vehicles safer, cleaner burning, and more fuel-efficient. And, let’s not forget factors such as morale and organizational image that are difficult to quantify. There are a couple of hard facts that are at the crux of the optimum replacement decision. Firstly, because depreciation is such a large cost relative to the others, it will decline faster than maintenance costs increase. This may go contrary to conventional wisdom because most people remember the $2,000 repair bill on the 10-year-old car much more clearly than they do the $2,000 depreciation loss when they drove it off the dealer’s lot. The second is the unquantifiable factor. Company image and employee morale may actually factor into the replacement decision, even though these items have no direct financial impact.

Answer 138

5.3.1 What are the advantages and disadvantages of extending a vehicle’s lifecycle? (p.92-93)

Question 139

As with the lifecycle model to select a vehicle, the optimum replacement model requires information to be collected or determined before the analysis can be done. * Annual Miles Driven – Estimated or actual number of miles driven * Annual Shifts – Number of 8-hour shifts a vehicle is used per year. Typically, a vehicle used by one person puts in 256 shifts per year. * Maximum Replacement Years – Number of years vehicle is estimated to be in the fleet * Maximum Replacement Miles – Number of miles vehicle is estimated to be driven before replacement * Net Acquisition Cost – Acquisition cost of vehicle and all make-ready costs * Interest Rate (or Return on Investment) – Interest rate on money borrowed to acquire the vehicle, or return on investment if money had been used for something other than an asset purchase * Miles Per Gallon * Fuel Cost Per Gallon * Loaner Vehicle Cost (per mile) – Cost of a loaner vehicle when the main vehicle is down for maintenance/repairs

Answer 139

5.3.2 What information must be collected for the analysis to be complete? (p.93)

Question 140

Once these items have been gathered, it is time to look at the maintenance estimate. While all maintenance and repair costs for a vehicle were lumped together for the vehicle selection model, it is more advantageous to break out these costs in a line- by-line model, as the costs themselves are not the only item being considered. It is also appropriate to consider the cost of a rental or pool vehicle every time the maintenance demands it. Typically, the maintenance and repair items are listed according to the manufacturer’s recommended maintenance schedule. They are also listed with the relevant mileage or time intervals for the service. They can be listed as a grouped service (such as an annual service), or they can be broken out by each item contained in the grouped service (oil change, tire rotation, brake check, etc.). Once these items are listed, an estimated cost for each of the services should be listed as well. These costs and the frequency with which they occur are at the heart of the maintenance and repair calculations.

Answer 140

5.3.3 What should be considered when determining the maintenance cost for a vehicle? (p.94)

Question 141

Lastly, the time for each of the repairs needs to be calculated. If the time necessitates a rental vehicle, then the cost of the rental vehicle for that service needs to be included in the overall maintenance costs. After all, if a service were not performed, then there would be no need for a rental in the first place.

Answer 141

5.3.4 When do you include the cost of a rental vehicle in maintenance cost? (p.94)

Question 142

Since a vehicle has a finite time to be active and useful in a fleet, the original gathering of data comes into play. Maximum replacement years and maximum replacement miles are a good starting point, but most calculations will show whether or not the maximum is an optimum point or if the assumptions need to be changed based on actual figures.

Answer 142

5.3.5 What are some factors that would determine whether a vehicle should be kept? (p.95)

Question 143

Since the costs in year seven are greater per mile than the costs in year six, it makes prudent financial sense to replace the vehicle during year six and before year seven starts.

Answer 143

5.3.6 When is the optimal time to replace a vehicle? (p.96)

Question 144

REPLACEMENT AND STRATEGIC PLANNING When using a lifecycle cost analysis for replacement and strategic planning purposes, it is helpful to remember that all lifecycle cost calculations have elements in common that need to be considered: * Planned Vehicle Life * Cost of Money * Management Fees * Book Depreciation * Build Time Delay * Personal Use * Downtime Cost * Predicted Resale Values

Answer 144

5.4.1 What elements do all LCA calculations have in common? (p.97)

Question 145

However, since lifecycle cost models calculate the costs for a vehicle over its life in today’s dollars, it is sometimes necessary to know how to project what a vehicle will cost when it is bought in the future. This means that one has to do two calculations; calculating future cost and calculating the present worth of a future transaction. For our example, consider a vehicle that costs $25,000 in today’s dollars, and the lifecycle model indicates that it should be replaced in 4 years. An estimate of what that same vehicle will cost if purchased four years out must be considered. The formula to find this is the future cost formula, which is one (1) plus the inflation rate, to the number of years, multiplied by the present cost (Future Cost = Present Cost x (1 + inflation rate)t). For the vehicle that costs $25,000, and a 2% inflation rate, in four (4) years that same vehicle would cost $27,060.80. If the vehicle costs $27,060.80 in four years, one must know how much money should be put aside today in order to have the $27,060.80 available to buy the vehicle. The formula to find this is the present worth formula, which is one (1) plus the interest rate, to the number of negative years, multiplied by the future cost (Present Worth = Future Cost x (1 + interest rate)-t). As an example, given an account that returns 4% interest, in order to accumulate $27,060.80 over four years one would then need to place in that account $23,131. Using the common elements in a lifecycle analysis and knowing that the analysis itself is only good for the time it is developed can help pinpoint when a vehicle should be acquired and when it should be replaced, but it does not necessarily (in and of itself) dictate policy. It only shows if and when policy may need to be amended or re-examined. This is a function of the strategic planning process.

Answer 145

5.4.2 How do you calculate the future cost of a vehicle and why is it important in the LCA process? (p.97-98)

Question 146

The process of developing a strategic plan is part of the business of running an organization. Top management establishes the organization’s philosophies, guidelines and mission and provides overriding policies for the organization. It is the department manager’s responsibility to actively participate in this process, to ensure they are involved in the communication process and to show (through actions and communication) their support for the strategic plan.

Answer 146

5.4.3 Describe the process of strategic planning. (p.98)

Question 147

The fleet manager should take the lead in providing formal feedback to top management when their goals and objectives cannot be accomplished due to conflicts with the strategic plan. They should also provide positive feedback where the vision provided helps to achieve the goals.

Answer 147

5.4.4 What is the Fleet Managers role in the strategic planning process? (p.98)

Question 148

Linking a lifecycle cost analysis to the strategic plan has its advantages and disadvantages, depending on how the arguments are made. A lifecycle model is a good tool to show the financial impact of a decision. It can also justify the findings and show all the costs associated with the decisions being made.

Answer 148

5.5.1 What are the main sections of a lifecycle model? (p. 100)

Question 149

As an aside, these spreadsheets also lend themselves to using powerful Excel tools like “Goal Seek”, or its older cousin “Solver”, to help answer some fairly perplexing questions. For example, for those who lease vehicles using a Terminal Rate Adjustment Clause (TRAC), setting the appropriate book depreciation rate to achieve desired results can be determined using the Goal Seek tool. If a fleet manager wanted to plan on breaking even at the end of the lease so that payments for depreciation in the monthly rate were equal to the expected effective depreciation, he would set the expected TRAC adjustment cell on the spreadsheet to a value of zero (0), and allow Excel to change the book depreciation rate cell value. This would optimize monthly payments to achieve the desired TRAC result. Besides a war game model that can lead to different scenarios under different conditions, one can also conduct a sensitivity analysis to see the outcomes of certain decisions if a certain parameter has been changed. For example, if a lifecycle cost analysis was conducted on three vehicles at $1.90 per gallon for gasoline, the bottom line total of the lifecycle for each vehicle can be determined. Then, by changing the amount paid per gallon of fuel, new bottom line totals for each vehicle are determined. This may indicate that a certain vehicle is more cost effective in a fleet at higher gasoline prices. If the prices were lowered, the same vehicle may not give the anticipated savings and another vehicle may be more appropriate. Scenarios like this help to indicate when additional factors need to be considered, especially in a volatile fuel market or commercial lending situation.

Answer 149

5.5.2 What parameters can be changed to affect the outcome of the analysis? (p.101)

Question 150

The discussion earlier of an optimum replacement lifecycle cost analysis model, comparing the various holding periods for the same vehicle, takes into account the changes in depreciation, operating costs, and downtime for each year and yields the lowest cost option. Depreciation cost per year went down as expected, sharply at first and then more gradually.

Answer 150

5.6.1 How is depreciation affected over the lifetime of the vehicle? (p.101)

Question 151

Annual costs of maintenance repairs generally went up as the vehicles got older but there were spikes as major components were replaced on a predictable interval. It is the downtime expense going up as both repairs and breakdowns come more often and become more severe that usually becomes the deciding factor in an optimum replacement analysis like this.

Answer 151

5.6.2 How is maintenance cost affected over the lifetime of the vehicle? (p.101)

Question 152

It is the downtime expense going up as both repairs and breakdowns come more often and become more severe that usually becomes the deciding factor in an optimum replacement analysis like this.

Answer 152

5.6.3 What is usually the deciding factor in an optimum replacement analysis? (p101)

Question 153

Once it is determined that optimum replacement will be based on an LCA model, local authorities should be approached to verify that procurement codes allow for the use of an LCA model in the replacement decisions. When all the work is done in figuring out how to acquire the vehicles, which vehicles to select, and when they should be replaced, it is critical to determine how to best communicate to the organization how the fleet department can forward the organization’s plan. The fleet manager’s objective is to convey information in order to achieve approval. First, he must determine what he is trying to accomplish and then he must build his case around that. Using the strategic plan and linking it to fleet recommendations is a good way to proceed.

Answer 153

5.6.4 What is the Fleet Manager’s objective and how can they achieve it? (p102)

Question 154

Benchmarking can be used to develop an understanding of fleet conditions and performance attributes that cannot be attained through first-hand observation or second-hand information. It can provide focus to processes and performance improvement efforts. In some cases, benchmarking can allow you to zone in on underlying causes of performance deficiencies. It will help you gauge progress towards the attainment of specific goals and objectives. Lastly, it can communicate competence and competitiveness.

Answer 154

6.1.1 How can benchmarking be used? (p.106)

Question 155

Benchmarking has the potential to create value by: * Focusing on areas of performance within an organization that require improvement. * Identifying ideas from other organizations that may assist in improving performance. * Creating an agreed upon strategy on how to move an organization forward * Making more informed decisions based on improved knowledge of potential performance.

Answer 155

6.1.2 How can Benchmarking create value? (106)

Question 156

As a first step, you need to define what your objectives are – what are you going to measure? Once you establish your objectives, you need to define how you are going to measure this objective. Following is a brief example of objectives and measures related to fleet financial management.

Answer 156

6.2.1 How do you determine your objectives and measure them? (p.107)

Question 157

Accessibility to good data is critical in a benchmarking exercise. Whether benchmarking internally or with an external organization, you must first collect your internal data. Internal data may come from many sources – your Fleet Information Management System (FIMS), other corporate systems, surveys such as customer satisfaction surveys and interviews. The type of internal information needed for a benchmarking review can range from cost data (maintenance, fuel, lifecycle, etc.) to crash statistics, to customer satisfaction ratings.

Answer 157

6.2.2 What data should be collected in order to benchmark? (p.107)

Question 158

Once you have gathered the data from all applicable sources, you can then compare or measure your performance against the benchmark you are using. Some common performance measurements are: * Total operating cost per mile/km (based on similar vehicle platforms) * Total lifecycle costs per mile/km * Fuel efficiency * Vehicle utilization * Vehicle downtime * Crash costs

Answer 158

6.2.3 What are some common performance measurements? (p.107)

Question 159

Benchmarking is not an end in itself, but a means of identifying opportunities for improvement and for ensuring that performance levels are maintained at acceptable levels over time. The fact that the benchmarking process reveals that an organization, a division, a class of vehicles, etc., is getting a failing grade in a “subject” does not mean that the path to improvement is clear, merely that improvement is needed. Eventually, it becomes essential to put away the calculator and focus on the conditions and business processes that underlie poor performance statistics. Process mapping and gap analysis techniques must be employed to find the weak links in the chain that cause breakdowns in organizational efficiency and effectiveness. In addition to evaluating the intrinsic soundness of existing business processes in terms of their logic, orderliness, and thoroughness, it is often helpful to compare them with the policies, procedures and practices employed by other fleet operations. This is an area in which surveys of other fleet management organizations can achieve a good return on investment. Such surveys don’t suffer from the difficulties involved in comparing quantitative performance levels across organizations because their focus is on identifying best business practices.

Answer 159

6.2.4 How can benchmarking identify what conditions and practices should be changed within the organization? (p.108)

Question 160

The last step involves putting into place processes that address areas of improvement you have identified in your benchmarking exercise. Some common processes that can improve performance and cost competitiveness are noted below: * Work scheduling * Exception reporting * Employee Training * Communication * Quality assurance * Incentives/rewards * Acquisition methods/policies/practices

Answer 160

6.2.5 List some common processes that can be improved in order to improve performance. (p.109)

Question 161

EXAMPLES OF BENCHMARKING TOPICS What you benchmark depends on your audience and your objectives. Some of the more common benchmarking topics in fleet operations are listed below. * Vehicle availability or downtime rate * In-service breakdown rate * Ratio of actual to budgeted expenses * PM schedule adherence rate * Work order turnaround rate * Average maintenance and repair backlog * Mechanic productivity rate * Total life cycle cost * Total cost per mile/kilometer * Direct/billable hours by mechanic * Efficiency rate by mechanic * Repair comeback rate by mechanic * Parts order fill rate: percentage of orders filled from stock * Parts order fill time * Inventory turnover rate * Inventory utilization rate: percentage of inventory lines used in last 12 months * Technician to supervisor ratio * Technician to parts technician ratio * Ratio of administrative and managerial personnel to direct service personnel * Ratio of vehicles to fleet management personnel

Answer 161

6.3.1 What are some of the more common benchmarking topics? (p.109-110)

Question 162

While benchmarking is a process used in management to evaluate certain aspects of processes in relation to industry best practices, performance metrics can be defined as a system of parameters or ways of quantitative and periodic assessment of a process that is to be measured, as well as the system to carry out and assess such measurements. Typically, metrics are specialized and cannot be used for benchmarking purposes outside of the domain for which they were created. Often, the metrics tracked are called key performance indicators or KPIs.

Answer 162

6.4.1 What are performance metrics? (p.110)

Question 163

Some common key performance indicators are: * Maintenance cost per mile or km * Maintenance cost per vehicle specification * Overall fuel consumption * Number and frequency of breakdowns * Number and frequency of technician road calls * Hours of service lost * Schedule hours versus actual hours * Average vehicle utilization * Average collision rate

Answer 163

6.4.2 List some common performance metrics. (p.110)

Question 164

Performance metrics can be used to: * Identify areas for improvement * Illustrate good performance (particularly to management) * Help achieve goals and objectives * Build a business case to obtain more resources * Build a business case to change method of doing business (i.e. outsource, in- house, etc,) * Emphasize value to clients or management * Improve client satisfaction * Help establish budgets * Refocus priorities * Measuring a contractor’s performance * Regulatory compliance * Improve productivity * Improve equipment productivity and effectiveness * Control maintenance costs

Answer 164

6.4.3 What can performance metrics be used to achieve? (p.111)

Question 165

Performance metrics are useful indicators of the tactical day-to-day performance of fleet operations, as well as strategic long-term performance trends. They provide a rational, quantifiable methodology with which to evaluate performance and to compare that performance with past performance and/or peer organizations. What is measured depends on who the target audience is and what the objectives are. Performance reports should be tailored according to the audience. For example, senior management is typically more interested in high-level information that is linked to organizational objectives. Here are suggested performance reports for each level of audience:

Answer 165

6.4.4 What do performance metrics show? (p.112)

Question 166

Executive Manager, Customer * Vehicle availability or downtime rate * In-service breakdown rate * Ratio of actual to budgeted expenses * Crash rate Fleet Manager * PM schedule adherence rate * Work order turn-around time * Average maintenance and repair backlog * Technician productivity rate * Fuel consumption rates * Total life cycle cost by spec Maintenance Manager * Direct/billable hours by technician * Efficiency rate by technician * Repair comeback rate by technician Parts Manager * Parts order fill time * Parts order fill rate * Inventory turnover rate * Percentage of inventory with no movement in last 12 months

Answer 166

6.4.5 List some performance reports appropriate for each level of audience. (p.112)

Question 167

There are many different methods and tools available to managers to have a fast and comprehensive view of performance. Some of the more common in use today are the Balanced Scorecard and Dashboard. Digital dashboards use visual, at-a-glance displays of data pulled from systems to provide warnings, action notices, next steps and performance summaries.

Answer 167

6.4.6 What are some of the more common reporting tools? (p.112)

Answer 168

6.5.1 Why is it important to measure performance? (p.113)

Question 169

In today’s world, fleet managers are under pressure to show results, cut costs and support the mission of the organization. This is a logical expectation from a business standpoint. The ability to be successful lies within the practices and systems that make up the maintenance function. It is not just what you do - it is how well you do it. Following are objectives of an effective fleet operation: * Support organizational objectives by keeping vehicles and equipment in good operating condition. * Keep maintenance facilities in a safe and functional state. * Perform quality work. * Anticipate and prepare for future organizational priorities * Strive for continued improvement, by evaluating performance, taking corrective action and measuring progress. To have an effective fleet operation, you must first have policies and expectations that serve to guide staff in supporting activities.

Answer 169

6.5.2 What are some objectives of an effective fleet operation? (p.113)

Question 170

To have an effective fleet operation, you must first have policies and expectations that serve to guide staff in supporting activities. Policies must be deployed, communicated and monitored. One of the more common hindrances to continued improvement in effectiveness and efficiency in fleet operations is resource issues. Benchmarking and performance measurement tools can be used to help identify and address resource issues. These topics will be dealt with in more detail further on in this chapter. Poor planning, improperly trained staff, unclear goals and objectives, lack of leadership, poor record keeping, and a lack of resources can cause fleet operations to take longer and cost more, and can result in a reduction in work quality. The result is an operation that is poorly positioned to compete effectively. Solid management practices support a strong management system geared toward proactive activities involving the total organization. Improving these practices requires patience, management commitment and dedication, as well as the willingness to make it happen through well-conceived plans and actions. Measuring these practices is important to see how well they perform. However, the ultimate indicator is how well the fleet enables the rest of the organization to meet its goals and objectives.

Answer 170

6.5.3 What do you need in order to have an effective fleet operation? (p.113-114)

Question 171

The biggest obstacle of all confronting fleet professionals is being forced to do more with fewer resources. Fleet departments must deliver superior services, comply with regulatory requirements and provide detailed financial accountability all within the confines of limited and/or reduced budgets. In order to meet these challenges, fleet managers must arm themselves with economical computerized maintenance management systems. This involves having a Fleet Information Management System (FIMS) that is capable, well supported and fairly easy to use.

Answer 171

6.6.1 What is the biggest obstacle facing Fleet Managers? (p.114)

Question 172

These areas include: equipment data management, work-order control, preventive maintenance, inventory control, documentation control, system security, ease of use, customizable reports, user configuration and metrics. When evaluating maintenance management systems, careful examination of these factors during the evaluation process will help ensure ongoing FIMS success.

Answer 172

6.6.2 What are some components of an FIMS that would be useful to a Fleet Manager? (p.114)

Question 173

Your FIMS should have a means of alerting you when work is covered by warranty and when costs deviate from contract rates.

Answer 173

6.6.3 What are two events when the FIMS should alert the Fleet Manager? (p.114)

Question 174

Exception Reporting Exception reporting is a means to leverage computing power to help with the task of monitoring data accuracy as well as operational performance. Here are some key steps to establishing effective exception reporting and dealing with problems once they are noted. First, you need to decide what is important enough to track. You and your staff have a limited amount of time to generate and review reports, so you need to prioritize what to check, how often to check it, and who should do the checking. Establishing the importance of something to be monitored should involve assessing its relevance to obtaining organizational goals and objectives. Does it impact how your customers or executives perceive the fleet organization’s performance? Does it affect recommendations or decisions you must make? Bottom line, what is the risk of something going wrong and the impact if you don’t catch it early?

Answer 174

6.7.1 What are some key steps to establishing effective exception reporting? (p.114- 115)

Question 175

Once you decide what to measure and report on, you need to establish exception reporting thresholds. The primary difference between an “exception report” and standard informational reports is that only data outside the norm is shown, or at least clearly highlighted for easy identification. For example, you don’t want to spend hours looking at a listing of thousands of valid fuel transactions; instead, you want to see the few with substantially lower than average MPG values that indicate that there may be a problem with the vehicle or that there is potential theft occurring. In order for the computer to make this selection for you, you must first tell it what criterion makes the data “exceptional.”

Answer 175

6.7.2 What are exception reporting thresholds? (p.115)

Question 176

If you want to better manage your client’s expectations, a Service Level Agreement (SLA) may be worth considering. An SLA is a negotiated agreement designed to create a common understanding about services, priorities and responsibilities. By providing a shared understanding of needs and priorities, an SLA can serve as a great communications and conflict prevention tool. To be continuously effective an SLA must be a living document. Reviews should be completed on a predetermined frequency to assess adequacy and negotiate adjustments. Done properly, SLAs are an objective basis for gauging fleet operations effectiveness and will help ensure that both parties use the same criteria to evaluate service quality.

Answer 176

6.8.1 What is a Service Level Agreement (SLA)? (p.116)

Question 177

Service Elements To be effective, a service level agreement must incorporate two sets of elements: service elements and management elements. The service elements clarify services by communicating such things as: * Maintenance or other services to be provided * Service Standards, such as time frames * Responsibilities of both parties * Costing details, including escalation factors

Answer 177

6.8.2 What service elements must be clarified in the SLA? (p.116-117)

Question 178

The management elements focus on such things as: * How service effectiveness will be tracked * Communication (how effectiveness will be reported) * Conflict resolution * Review/revision procedures

Answer 178

6.8.3 What management elements must be clarified in the SLA? (p.117)

Question 179

For an SLA to be successful, customers must be part of the process. Creating an effective SLA requires spending time information gathering, analyzing, documenting and negotiating. Key steps in establishing a maintenance services SLA are: * Data gathering (highly dependent upon the effectiveness of computerized fleet management software) * Consensus between parties * Outline responsibilities of both parties * Draft, implement and manage the agreement The main reason organizations enter into service level agreements is to improve the effectiveness and efficiency of service delivery. There are benefits for both customers and service providers.

Answer 179

6.8.4 What are the key steps in establishing maintenance services? (p.117)

Question 180

Benefits of a Service Level Agreement * Sets clear performance expectations of the customer and service provider. * Clarifies the roles and responsibilities of both parties. * Focuses attention on customer’s priority needs. * Encourages a service quality culture and continuous improvement. * Provides a mechanism for both parties to plan for the future. * Puts purchasing power into the hands of the customer. * Provides a useful tool for the customer to monitor performance. * Service providers are in a better position to plan their delivery function. * Can provide greater certainty of income for service providers.

Answer 180

6.8.5 What are the benefits of a service level agreement? (p.117)

Question 181

A service level is similar to standards, but the term is usually used for organization- wide performance. A service level is an agreed measure that might include one of the following elements to describe the performance of a service delivery: * Quantity * Quality * Timeliness * Cost

Answer 181

6.8.6 What is a service level? (p.118)

Question 182

Establishing Performance Indicators Having decided on appropriate service levels, the next step is to agree on how these will be measured. Following are just a few examples of performance indicators you could have in a SLA: Action Response Parameters Goal Service faults should be reported immediately and prompt action should be taken Visual checks relating to vehicle serviceability specified in the owner’s handbook will be made at the beginning of every working day All other service matters affecting serviceability reported by users through vehicle logs will be acted on before the vehicle is next made available for use if the matter relates to the roadworthiness of the vehicle 95% 100% Fleet vehicles will be regularly serviced in accordance with manufacturer requirements Fleet vehicles requiring service will be booked in for the service within 24 hours of the service becoming due, or within 24 hours of the return of the vehicle to Fleet Management after use 100%

Answer 182

6.8.7 List some performance indicators that could be included in an SLA. (p.118)

Question 183

Creating performance measurements is a crucial part of the benchmarking process. And a most crucial part of this creation process is to consult with your customers to find out what they really want and with your employees to find out what they need to achieve success. This consultation has a significant impact on how your maintenance operation’s overall performance is managed. If your customers and employees are part of the planning process, they then become part of the achievement as well, building an environment of trust and openness that can really turn things around. Trust and openness stimulate buy-in, and buy-in is what unifies an organization around a strategic mission. The critical areas of practice in the establishment of measurements are: * Define what measurements mean the most to your customers, stakeholders and employees. * Commit to initial change. * Maintain flexibility.

Answer 183

6.8.8 Why is it important to consult with customers when establishing performance indicators? (p.119)

Question 184

Accountability for implementing and using a set of measures within an organization lies with those responsible for achieving the organization’s intended goals. In many organizations, it is the responsibility of the entire workforce to work toward these goals; they are thus being held accountable for outcomes not completely under their control. And while the problem of management buy-in regarding accountability may be less obvious, it can still exist. Front-line managers may feel like any other employee and resist being held accountable for outcomes they cannot completely control. The best practices listed below reflect some ways to develop and “cascade” accountability throughout an organization. They emphasize the role of leadership in the process as well as the need for communication with customers and employees. The best practices include the following: * Lead by example. * Cascade accountability: share it with the employee. * Keep the employee informed. * Keep the customer informed. * Make accountability work: reward the employee.

Answer 184

6.8.9 List some best practices for developing accountability. (p.119)

Question 185

Collect Performance Data Collection of performance data increases accountability and provides a baseline of information from which trend data and success/failure rates can be derived. * Be willing to invest both time and money to make it right. * Make sure your performance data means something. * Recognize that not everything is online or in one place. * Measure the right thing, and then measure it right. * Centralize the data collection function at the highest level possible.

Answer 185

6.8.10 What are some guidelines for collecting data? (p.120)

Question 186

Obtaining good data is only half the battle. You also have to be able to analyze it and use it to improve your performance. * Combine feedback and performance data for a more complete picture. * Conduct root-cause analyses. * Make sure that everyone sees the results of analyses. Data should primarily be used to determine key processes within an organization and to monitor performance. Process improvement is at the heart of performance management, and data should be used not only to correct deficiencies but also to hone processes and performance.

Answer 186

6.8.11 What are some guidelines for analyzing the data collected? (p.120)

Question 187

Creating a balanced set of performance measures involves balancing customer, stakeholder and employee interests, establishing accountability and collecting usable data. But translating that set of measures to achieve an organization’s mission means connecting those activities to the organization’s daily operations. Chapter 6 Benchmarking NAFA’s Financial Management Guide While this basic principle is widely recognized in theory, practical application has widely varied levels of success. The key to driving actions and results is to connect all the critical elements, namely: * Connect to employees and customers. * Connect to the business plan. * Integrate with data systems. * Integrate with the budget process.

Answer 187

6.8.12 What critical elements must be connected in order to drive actions? (p.121)

Question 188

Sharing the Leadership Role Without exception, strong leadership is a key success factor in applying a balanced approach to performance management. Without support from senior management and top officials, it is difficult -- although not impossible -- to establish a successful strategic framework that integrates all the factors discussed in this chapter. Whether an organization’s management structure is a pyramid or more like a web -- characterized by interconnections crisscrossing throughout the structure -- certain leadership truisms are relevant. These are: 1. Good leadership relies on good communication 2. All members of the organization must have clearly-defined responsibilities. The best leaders... * Report back to the employees, customers and other stakeholders * Use self-assessment tools * Involve the legislative/legal branch through consultation or representation on working groups and committees * Involve the customer, stakeholder and employee at every phase of the management process * Involve the unions early and often. Leadership that takes into account feedback from its employees, customers and stakeholders, together with performance data, has a full scope of information upon which to make informed decisions. It is a basic tenet of good management that the more informed the decision, the sounder that decision will be.

Answer 188

6.8.13 What are some qualities and activities that a good leader possesses? (p.121)

Question 189

Before you can begin budgeting you need a full understanding of your organization’s strategies. Each organization will have short term and long term strategies, which will impact budgets. Does your organization grow through mergers and acquisitions? Are you facing downsizing or consolidation of sales territories? Do you frequently bring new products to market matched by an uptick in sales force hiring? Is there an organization-wide push to improve safety, or to outsource non- core business functions? Once you know the kind of organizational events to anticipate, you can move to the next step in budgeting – establishing a vehicle replacement policy

Answer 189

7.1.1 Why is it important to understand the organization’s strategy? (p.123)

Question 190

The greatest impact to any budget is the acquisition of new vehicles and remarketing of aged vehicles. Therefore, having a vehicle replacement policy is an important element to accurate budgeting. Car fleets generally operate within a 3 to 4 year replacement cycle, while light truck fleets typically operate within a 5 to 7 year replacement cycle (depending on the type of trucks). There is other specialized machinery that may have an expected life of 10 years or greater which is not addressed in this chapter. Once you can predict how many of each vehicle type you will be replacing over a given budgetary period, you can begin to shape your budget.

Answer 190

7.1.2 Why is it important to have a vehicle replacement policy? (p.123)

Question 191

Capital vs Operating Budget Fleets can acquire vehicles by either using capital dollars or financing them as leased vehicles. Your organization’s finance department will determine how this is treated. For vehicles purchased with capital funds, there are different methods for depreciating assets including straight-line depreciation, double declining balance depreciation, and others. Your finance department will determine how depreciation is allocated to the monthly operating budget. For example, a vehicle that was acquired using capital dollars for $24,000, and is depreciated over a 4 year period using straight line depreciation method will appear as a $500 monthly depreciation expense in the operating budget.

Answer 191

7.1.3 How might the budget structure for acquiring new vehicles affect the depreciation of the asset? (p.123)

Question 192

The two biggest elements of any fleet budget are depreciation and fuel. These two costs represent at least two thirds of a typical fleet budget. Predictability of these expenses can be challenging.

Answer 192

7.1.4 What are the two biggest fleet expenses? (p.124)

Question 193

Depreciation – As previously discussed, a vehicle replacement policy can assist in predicting depreciation costs. However, this then must be translated to an actual replacement schedule that identifies individual vehicles to be replaced. There are a variety of factors that can impact this schedule, including: * Driving Patterns: Are territories static or dynamic? * New Hires: Should you anticipate a new product launch or corporate expansion that will result in new hires that will need company vehicles? * Total Losses: Based on your historical crash rates, how many total losses should you anticipate? (This is especially important for organizations self- insured for comprehensive and collision). For leased vehicles, fleet managers should strive to break even at the end of the lease. The type of lease chosen will not negate back-end settlements. Closed-end leases can result in excess mileage charges and returned vehicle damage charges. Open-end leases will result in a gain or loss on sale after settling the remaining book value. Variations in open-end lease settlements are dependent upon the used vehicle market.

Answer 193

7.1.5 What are some recommendations for budgeting for depreciation? (p.124)

Question 194

Fuel – This can be the most challenging of fleet expenses to predict. Cost per gallon prices rise and fall, but over time fuel prices trend upwards. Factors that impact fuel budgeting are: * Cost per gallon * Driving patterns: Static or dynamic territories? * Change in average fleet age: Older fleets will consume more fuel than newer fleets * Change in average vehicle fuel economy: Are you introducing a large number of hybrids into the fleet? Some fleets have looked at fuel hedging as a way to neutralize spiking fuel prices. This will aid in budgeting, but there is a cost for these contracts.

Answer 194

7.1.6 What are some factors that might impact fuel budgeting? (p.124)

Question 195

A simplistic approach to budgeting other fleet expenses is to use the current year’s budget and apply a CPI factor to predict the next year’s budget. For more finite budgeting, we’ll examine each expense category: Maintenance – Grouping your vehicles into mileage-band categories is one way to start budgeting maintenance. Then project the number of vehicles in each mileage- band category in each budget period based on average monthly miles driven. Besides standard preventive maintenance, here are some costs to consider in each band:

Answer 195

7.1.7 How can a Fleet Manager budget for maintenance costs? (p.124-125)

Question 196

Crash – With crashes, past driver behavior will reasonably predict future driver behavior, so your loss experience should remain somewhat constant. There are a number of things that can influence this rate, including: * Instituting a safety training program * Weeding out high-risk drivers from the fleet * Influx of younger, less experienced drivers * Expansion of driver territories (pressure to cover more area in same time equals increased incidents of speeding) Even if your crash rate remains constant, the cost of repairs will increase over time. Applying a CPI factor to prior year’s loss experience is a reasonable approach to budgeting this expense.

Answer 196

7.1.8 How can a Fleet Manager budget for crash costs? (p.125)

Question 197

Lease Finance - Lease schedules for a coming year are fairly predictable with stable interest rates, even for floating rate financing. You can consult various government and economic websites for interest rate projects, (e.g. Bloomberg.com, Money. CNN.com, Bankrate.com, CBO.gov, etc.), and also consult your organization’s institutional lender.

Answer 197

7.1.9 How can a Fleet Manager budget for lease finance? (p.125)

Question 198

Used Vehicle Settlements – For open-end leases, the goal should be to break even at the back end of the lease. Setting depreciation rates properly based on vehicle usage is one part of achieving this. The other part depends upon the used vehicle market, which can fluctuate by the time the vehicle actually comes out of service. However, budgets for these settlements will be projected much closer to when the vehicle is sold, allowing for reasonable projections of settlements given used vehicle market conditions at the time.

Answer 198

7.1.10 How can a Fleet Manager budget for used vehicle settlements? (p.126)

Question 199

Violations – There has been an upward trend in these expenses as toll agencies seek additional revenues through pursuit of violations and as technology improves to identify violators and fulfill fine collection. Generally, since past driver behavior will predict future driver behavior, the CPI factor should account for more aggressive violation collections. Fleets that charge violations back to drivers will not be as impacted by this line item.

Answer 199

7.1.11 How can a Fleet Manager budget for violations? (p.126)

Question 200

Licensing – If your fleet size does not fluctuate significantly, these expenses generally remain the same year over year except for increases in state fees. Applying a CPI factor to these expenses will reasonably account for any changes.

Answer 200

7.1.12 How can a Fleet Manager budget for licensing? (p.126)

Question 201

Administration – Outsourced fleet management fees are reasonably predictable based on prior year fees. Internal administration resources would include salaries and benefits for all fleet staff and an allotment for overhead that is based on headcount.

Answer 201

7.1.13 How can a Fleet Manager budget for administration? (p.126)

Question 202

Facilities & Equipment - Fleets that operate their own internal garages must also include the operating expenses for maintenance garages. These are not treated in the same manner as other facilities that are considered part of the overhead allocation. Regular inspections and repairs to facilities and equipment need to be included in the fleet budget. Replacement for capital tools, (e.g. garage lifts, diagnostic machines, etc.) are typically included in the capital budget and allocated to the operating budget as depreciating assets.

Answer 202

7.1.14 How can a Fleet Manager budget for facilities and equipment? (p.126)

Question 203

Step One - Beginning one to two months prior to the end of the fiscal year, fleet managers need to establish their budget for the next fiscal year. S

Answer 203

7.2.1 When should a Fleet Manager establish their budget for the next year? (p.126)

Question 204

CREATING THE BUDGET Step One - Beginning one to two months prior to the end of the fiscal year, fleet managers need to establish their budget for the next fiscal year. Step Two – Put together a schedule of the organization’s planned activities for the coming year, and identify their impact to the fleet budget. Step Three – Determine available funds, including carryover balance from prior year, cash on hand, funds in the bank, etc. Step Four – Identify sources of income and estimate when it will come available, including employees’ payroll deductions for personal use of company vehicles, charge backs to other departments for use of pool vehicles, etc. Step Five – Identify expenses, both regular and periodic. Be sure to plan for events such as: * Organizational activity (e.g. new product launch brings in 200 new hire sales reps needing cars in fall) * Fleet initiatives (e.g. launch of new safety training program which all drivers will complete in the spring) * Scheduled travel and training (e.g. NAFA I&E Convention, site visits, supplier site visits) Step Six – Get price quotes for planned expenses, such as new vehicle acquisitions with updated model year information. Step Seven – Negotiate expenses as necessary. Step Eight–Submit initial budget recommendations. If you are proposing to include any new expenses in the budget, you will need to build a business case for this new expenditure. A strong case will include an examination of the Return On Investment (ROI) with a payback period calculated. You will have a better chance at approval if you can directly tie this initiative to organizational objectives. Step Nine – Executive committee reviews submitted budgets, advises of any bottom- line changes that need to be made. Step Ten – Review and revise the budget, keeping intact budget for most critical expenditures, and trim back on less critical expenditures as needed. Submit final budget to management. You’ve set your budget. Now you must carefully track expenses and periodically analyze your expenditures to ensure you remain on track to hit your budget.

Answer 204

7.2.2 What is the 10 step process for creating next year’s budget? (p.126-127

Question 205

Identify sources of income and estimate when it will come available, including employees’ payroll deductions for personal use of company vehicles, charge backs to other departments for use of pool vehicles, etc.

Answer 205

7.2.3 What are some sources of income that should be identified? (p.127)

Question 206

Identify expenses, both regular and periodic. Be sure to plan for events such as: * Organizational activity (e.g. new product launch brings in 200 new hire sales reps needing cars in fall) * Fleet initiatives (e.g. launch of new safety training program which all drivers will complete in the spring) * Scheduled travel and training (e.g. NAFA I&E Convention, site visits, supplier site visits)

Answer 206

7.2.4 What are some Expenses that should be identified? (p.127)

Question 207

Controlling Expenses Have procedures in place for expense approval and allow only approved expenditures. Be sure to communicate these approval procedures to all vendors and to all internal managers who can approve expenses. Have a monitoring system set up to ensure that all managers and vendors operate within these approval parameters. Perform periodic audits of records.

Answer 207

7.3.1 How can the Fleet Manager control expenses? (p.127)

Question 208

Analyzing the Budget Choose a metric for measuring performance against budget. The two most common metrics are cost per mile and cost per vehicle per month. This will help to neutralize variables of fleet size and utilization fluctuations.

Answer 208

7.3.2 What are the two most common metrics for measuring performance against the budget? (p.128)