Avoiding Capital Investment Pitfalls
CNNMoney reports that the U.S. economy is strong and growing at a steady rate: the job market is vibrant; inflation remains low; new tax cuts have become effective, and interest rates are on the rise. Business confidence is robust, and companies are poised to increase their capital investments over the next few years.
While this is all great news, it is critical for any management team to be prudent in planning capital investments so their business can operate and grow in a financially sound manner. Before committing to any large expenditure, companies should consider trends in the economic and business cycle, new advances in technology, and changes in global trade policies; all of which can play a major role in the success tied to these investments. Since capital investments tend to be large, it’s important to consider all factors carefully as these decisions often have a substantial impact on the bottom line well outside of the initial investment.
Part of that capital planning process should include examining the capital needs related to your fleet. This could mean increasing your fleet size by adding new vehicles or staying at the current fleet size and simply replacing older units. In addition, if your fleet assets are not currently financed, it may be time to consider using these assets to generate capital for investments elsewhere within the company.
ARI’s fleet experts can help guide your plan to budget for these investments, and I recommend you consider the following options as you analyze your capital needs:
- Fleet providers typically offer both fixed and floating rate interest lease options. Given the rising rate environment, it may be time to consider using fixed rates for new leases. It may also make sense to consider converting your existing floating rate leases to fixed rate. Even if you didn’t negotiate a one-time conversion into your current agreement with your fleet management company, it never hurts to ask for this courtesy. This may help mitigate an increase in your operating expense as rates rise. But it needs to be balanced with your view of the timing and extent of rate increase versus the difference in the current cost between the two options.
- Depending on your current lease structure and tax position, the new tax law may provide tax benefits if you plan to increase your fleet size or replace your existing vehicles. The new rules allow expensing of certain capital expenditures immediately, thereby potentially lowering current year taxable income. That said: other provisions such as interest expense deductions and tax on foreign subsidiary income may offset some of these benefits. Engage your tax professionals to understand these changes and optimize your tax position.
- Collect and analyze the Big Data behind your fleet so you can see the potential upcoming cost events on the horizon and then take steps to either avoid these or at least create a plan to mitigate them as much as possible.
- You can significantly reduce operating expenses by ensuring a regular replacement cycle of fleet vehicles. It may make sense to transition your fleet to a consistent, annual replacement strategy rather than replacing vehicles solely based on their age and mileage. This strategy allows for a more predictable year over year expense, allowing fleet managers to avoid the pain of accommodating budget forecast swings of ten to fifteen percent in order to adhere to age and mileage-based replacement parameters.
- Engage your fleet management company to explore options to generate capital from your current fleet. Options to consider include: refinancing existing leases, increasing amortization terms, selling certain units or tapping into the potential equity in existing vehicles.
In summary, it’s critical to understand what is driving the costs behind your fleet and to plan your upcoming capital investments. If you feel your company is not in the position to make capital investments, keep in mind that aging vehicles increase operating costs and reduce productivity due to vehicle downtime, ultimately impacting financial performance. Leasing vehicles and leveraging your fleet to reduce this impact and free up capital for other needs may be a prudent part of your capital investment and expense management plan. Lastly, ensure your company’s current funding option best matches its strategic and tactical goals, and be sure to examine those options in conjunction with market fluctuations.