Money Go-Round

By Tyler, Geoff | Financial Management (UK), February 2001 | Go to article overview

Money Go-Round


Tyler, Geoff, Financial Management (UK)


Without specialist knowledge, it is all too easy to go round in circles when it comes to making decisions about financing your fleet. Geoff Tyler looks at the implications of recent events

Fleet management has always been a fast-moving field, and the opening years of the new millennium are proving to be no exception. Fleet sales are 14 per cent down on last year so car-makers are cutting prices to boost the stagnant market; new Department of Trade and Industry regulations are eroding manufacturers' influence over dealers' offers; and heavy goods vehicle (HGV) drivers are protesting at business conditions in the UK.

And, just in case that's not enough of a challenge for management accountants, cars and lorries bring their own sets of problems. Two-thirds of company cars are now financed through contract hire, and contractors have been hit by the dramatic fall in used-car prices during the past two years. Tax rules mean that hirers return the car on termination of the contract, so it is the contractors who take on the risk of residual value not meeting their estimates. (Although hirers cannot buy the ears, a loophole means that their employees can.)

Discovering that returned cars are worth less than their book value would not be so bad if the new contracts reflected a corresponding drop in new car prices. But stubborn car-makers have left contractors with a widening gap between new and residual values, pushing up the monthly fees they have to charge.

Arval PHH is one of several companies offering contract hire, finance leases and hire purchase, so John Pout, its head of sales, can afford to be objective in assessing things from the contractor's viewpoint. "The gap between new car prices and residual values has at last reached a plateau, although it is not back to the levels of the mid-1990s. But the volatility of the price differential is more important to the fleet financing decision than its absolute value," he explains.

"When comparing contract hire with finance leases, hire purchase and outright purchase, only contract hire removes the residual value risk from the fleet user. Previously, some contract hire companies quoted optimistic residual values to offer cheap contracts. But if a contract hire company is too unstable to absorb losses on residual values -- and many have been hurt in recent years -- a receiver can demand your fleet back to sell."

A lesser influence is that dealers who buy cars outright get the same volume discounts that are offered to big fleet buyers, such as car rental companies. They can then pass on those discounts, minus their handling costs and a nominal profit per vehicle, to contract hire companies or to fleet users directly (the latter perhaps financing them with a separate finance lease).

It is too early yet to assess whether such car wholesaling operations will evolve significantly, but, without them, these big discounts would be available only when getting an entire ear fleet from one maker. That, according to Sue McMullen of the British Vehicle Renting and Leasing Association (BVRLA), can also create problems.

"Solus deals with car manufacturers are only a small part of the UK fleet mix and make it difficult for companies to offer more choice to their drivers -- a trend that will increase if, as we expect, more perk cars come back on to the fleet with the new taxation regime."

To a management accountant, abdicating the risk of falling residual values is worth a couple of percentage points in absolute costs because it allows accurate forecasting. The only danger is vaguely worded clauses on wear and tear. Some unethical contractors offering attractively low monthly payments still rely on these for their eventual profit.

A good finance contractor will also include an advisory service on car/driver management and cost issues. Taken to its extreme, this becomes outsourced fleet management, with maintenance analysis, car renewal policy, driver tuition, accident management and so on, which will be contracted for separately. …

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