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Category Archives: Management Information

Imminent IFRS16 Accounting Standards Will Impact Car Fleets: Make Them Work to Your Advantage

Imminent IFRS16 Accounting Standards Will Impact Car Fleets: Make Them Work to Your Advantage

The new IFRS16 accounting standard is effective from 1Jan 2019 and will affect publicly listed companies that operate a leased company car fleet. It is broad reaching legislation that fundamentally changes the way organisations report their leases, forcing them to be recognised under an on balance sheet accounting model.

Currently such leases are classified as Operating leases and are kept off balance sheet. These Operating leases’ will now only apply to leases which are 12 months or less or where there is a ‘low value’, which is generally accepted as less than $5k.

Consequently, companies who use a lease funding model to procure their car fleet are now obliged to report this information in a different, more sophisticated manner. Currently the leasing contracts can be reported on the P&L account, meaning there is no need to have such a detailed insight into the data held within each contract.

And here is the rub.

By moving the reporting to the balance sheet, companies must now have a far more robust leasing information system.

Many of our clients are working with their accountancy partners to establish a robust means of recording data on all leases throughout their business.

Our clients have the substantial challenge of understanding what specific values they need to capture in the first instance and thereafter what may change, all proving fundamental to the design and build of their ‘lease information systems’.

Discipline issues

What has taken many by surprise, is the huge variation of lease structures and reporting practices around EMEA, limiting the granularity of reporting in some cases to the lowest common denominator. It is not unusual in some less developed markets just to receive a single monthly rental figure which includes all services whereas, in others, finance and services are itemised to a granular level.

Also, what is evident, is that most businesses up to this point, have lacked discipline and structure when it comes to recording their vehicle lease contract arrangements with their suppliers.

At best, these are dispersed across the region and, at worst, contract documentation cannot be located at all.

And the retrieval of this data from across the EMEA region is perhaps the most challenging aspect of all. Communicating with sometimes more than 80 suppliers from 30 plus countries, and attempting to extract the required data in a standardised format, is no mean feat.

The idiosyncracies of vehicle leasing also add complexity to the recording and reporting process. Unlike equipment or building leases, where the rental and term remains static, vehicle rentals and end dates can change due to mileage variations. So, not only do the supply chain need to be engaged once to collect the initial data, they also need to be kept engaged so changes in rental or terms can be accurately reported.

Collecting lease data accurately and timely will be critical to the successful adoption of IFRS16 reporting. The challenge however, as we have found, is that a complex supply structure creates a complex array of data formats. And where corporates often have centralised structures with scant resource, it is very difficult to maintain dozens of supplier relationships at the right level to retrieve and manipulate the information to the right standard.

This ability to accurately collate and manage lease data is where Fleetworx clients have a substantial head start on their peers. As part of our “Fleet Category” management services, Fleetworx holds relationships with all the fleet supply chain on ours clients’ behalf. Which means we remove the pain of collecting critical contractual data and monitoring any contractual changes due to mileage variations or otherwise. Crucially, this data is also validated, cleansed if necessary and stored in Fleetworx Centrax database.

The value for our clients comes from the single report we produce which consolidates their lease data from across the EMEA region: helping them manage their “lease information systems” more closely, more accurately and less painfully.

We consider the introduction of IFRS16 an ideal opportunity for fleet owners to align their reporting systems, develop closer relationships with the fleet supply chain and gain a more thorough understanding of the fleet category cost. By its nature this then provides an excellent opportunity to deliver best practice and savings.

With support from a professional category management partner like Fleetworx, the task of developing a birds-eye view of the fleet category can be hugely simplified, whilst the rewards can be significant.

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Are you getting the best possible value from your car fleet? (part 3) – 6 more essential questions

Are you getting the best possible value from your car fleet? (part 3) – 6 more essential questions

As we learnt from part 1 in this mini-series, knowledge imbalance is a common by-product of outsourcing a company car fleet. This series of blogs covers the questions that must be asked of the supply chain to ensure they are delivering best value.

Part 1 dealt with the issue of transparency and cost control, whilst part 2 covers the subject of policy and best practice/value.

The third and final series of questions concern the provision of management info and how it helps you make decisions.

  1. What is our trend on pence per mile per vehicle spend and why?

Your supplier should have the reporting infrastructure to advise on your pence per mile per vehicle spend. A more accurate picture can be built using a TCO approach, but this will require a more sophisticated reporting system. To correctly analyse your spend and make strategically sound decisions, it is essential that you have a clear and accurate understanding of your entire supply chain, and all its associated costs. Your suppliers should be able to provide you with a detailed analysis of your spending and explain its direction.

  1. How do our costs compare with those of our peer group?

Understanding your company car benefit program in the context of your peer group is essential for effective recruitment and retention. Company car benefit is a highly visible component of a reward package and is an effective recruitment tool. Your supplier should have appropriate data systems which can collate and analyse all your spend categories. They should then be able to lay this against that of your peer group and advise on your position within your sector. Having this intelligence ensures your company car benefit design is working to your advantage.

  1. What are the key risks for increased costs for the future?

Transparency and insight to your cost structure will help you understand your areas of risk going forward. Your suppliers should have the ability to categorise your spending and interrogate it thoroughly to analyse the potential ramifications of category cost increases. They should then offer strategic advice on how to avoid cost creep.

  1. Do we have total visibility on all areas of company car fleet spend? If not how do we incorporate the missing areas of spend. (e.g. capture trading up and trading down payments and voluntary flex payments or receipts)

Visibility on all areas of spend is essential for controlling the company car fleet supply chain. A generalist who has been allocated the responsibility of managing a businesses company car fleet may assume the only spend to manage is the monthly lease rental cost. Naturally this cost is important, but it is only one of many cost lines that need to be managed. If a company car benefit program is correctly managed, it is quite possible for it to have up to 60 cost lines allocated to over 15 cost categories. A cost centre such as Finance Lease may contain 10 different cost lines, only one of which relates to the monthly lease cost. Others will be:

  • Excess mileage charge
  • Early termination
  • Trade-down driver payment

Collating the detail and allocating it to the correct cost centre, is the only way that the total investment in the company car fleet can be understood. It is very important to maintain tight control on all the spend lines as they are so broad that they can easily be incorrectly allocated, undermining the actual true value of the investment. For example, if a policy allows an employee to trade-up their car for a more expensive model the system must ensure the appropriate contribution is collected and allocated. Whereas conversely if an employee wishes to trade-down, the correct payment must be made to that employee via payroll.

  1. Does our management information give us sufficient detail on our strengths, opportunities etc

Company car benefit design is a dynamic and complex process, with many variables at play. Consolidating these influences to help strategise about the direction the company car benefit should take is very important to maintaining its profile and share of voice within the business. Having the intelligence to help strategic decision-making is vital and having a management information system that can interrogate the company car program and translate its intricacies into discernable management information is of great value. Any fleet stakeholder should be able to use the management information system to outline a SWOT analysis of the program. It could uncover strengths such as advantageous fixed terms with manufacturers providing good value for money and contributing to accurate forecasting.

It could identify weaknesses such as high overall C02 emissions, contributing negatively to the companies ESOS position. Or it might expose threats such as a large amount of unplanned spend (accident damage, insurance claims, hire car costs etc) which, if unchallenged, could become an increasing cost burden.

It could also show opportunities by identifying how a series of smart policies could improve the perceived value of the company car selection policy without increasing cost: a valuable tool for recruitment and retention.

An increasing priority for many fleet stakeholders is having detailed management information, the raw data for which sits with the various suppliers. The challenge facing fleet owners, however, is creating systems to extract and analyse the data and provide sensible reporting that adds value to the decision making process. Such systems are only of value when they are external to the supply chain, as only then can the data be verified and independently analysed. Fleetworx provide this independent, accurate management information, ultimately helping the supply chain work better for everyone through a combination of data analytics, technology and expertise.

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The Hidden Cost Threat in a Company Car Fleet

The Hidden Cost Threat in a Company Car Fleet

Creating a water-tight contract at the beginning of the supply agreement is one of the most important things any fleet stakeholder will do when dealing with fleet. We can say this with absolute confidence as we know what happens when car fleets mature and morph from their original formation.

The nature of our business means we collate and analyse heaps of data. We collect data from all areas of the car fleet supply chain and are perfectly positioned to analyse this data and see what it tells us. And one of the most startling things is the potential for massive cost creep if the initial contract is not sealed water-tight. It is quite normal to assume that there will be some degree of flux within a contracted fleet and quite natural to expect some out of contract costs to develop over time. However, our analysis tells us the extent to which unplanned, variable spend can influence the contract cost.

We looked at the data of a pan-european company operating a large car fleet across many countries. We gathered the data from the last 5 years of their car fleet operation and ran it through our systems to determine the nature of the data. We looked at nearly 20,000 invoices and over 1.6m individual cost lines. The most telling revelation was the amount of unplanned variable cost, relative to the total cost of operating the fleet: almost 1 in every 4 euros spent on the fleet was outside of the original contract.

Car fleet hidden costs

Hidden Cost Infographic

These findings are significant, as costs that are outside the original contact are, by nature, unplanned and variable. Because they are not influenced by contractual terms they can attract margin from the supply chain, contributing significantly to the cost creep of the contract. And when 25% of the total cost of operation is an unplanned cost, it reinforces the need to create contracts that capture these costs and restrain the potential for them to be manipulated to the benefit of the supply chain.

These out-of-contract costs come from a number of sources. One of which is the cost of running out-of-contract vehicles. All vehicles are introduced to the fleet under contractual terms that control the cost of operation. However, once the contractual term of a vehicle has expired, and the vehicle remains in the fleet, it becomes an out-of-contract cost that can often attract punitive charges from the supply chain. If only a small number of cars happen to be running on out-of-contract terms then it is entirely manageable, however, our research discovered a very different and worrying scenario.

View our infographic here to see the results of our research

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