There is a framework that you should look at when thinking about your business vehicles. Once you understand it, it will make your decisions a lot easier, and will change the way you look at the cost of your fleet; total cost of ownership (TCO)
With the climate crisis and the pandemic all around us, taking time to evaluate your business priorities and expenses could mean changes to your fleet that could save you money.
One of the most important things you should be considering is how to look at all your vehicles’ costs over the whole time you use them. This is called the total cost of ownership (TCO) and it’s used to assess the direct and indirect expenses of a vehicle across its lifecycle. Knowing the difference can help you calculate when it’s worth the switch to EVs, as well as understanding long-term cost savings, for example with an EV’s reduced maintenance package.
What is TCO?
Many businesses base their vehicle choices on the purchase price or lease rental. However, TCO covers taxes and National Insurance, depreciation, fuel, insurance and repairs. This means TCO calculates a vehicle’s real cost over the time you’re operating it. As such, TCO is seen as the only accurate method for calculating the true cost of running a vehicle, regardless of your powertrain.
Using TCO to evaluate two different vehicles for your business means you’ll easily be able to see which one would benefit your business. You’ll be able to project which one is most cost-effective over the life-time of the vehicle - even if they have similar on the road prices or lease rental costs, it will become clear if it’s possible to potentially save your business significant amounts of money.
TCO could also prove a highly effective solution if you’re looking to run a different class of vehicle to the norm to facilitate the introduction of alternatively-fuelled vehicles (AFVs) such as hybrid or battery electric vehicles (BEVs). Of course, the everyday practicalities of such vehicles for your business will also need to be carefully considered, but using a TCO framework will provide a clear guideline to their likely costs to your business.
How TCO helps analyse different funding methods
TCO can also be employed to weigh up the benefits of different funding methods – which is another key requirement for all businesses, big or small, looking to make cost savings. Due to legislative changes and wider economic adjustments, you may find that your current approach to funding vehicles is no longer as cost effective as previously, and it is certainly beneficial to explore other funding methods, such as Contract Hire or Contract Purchase.
Switching powertrain means you could potentially save money on servicing and maintenance. With an electric car, like an ICE vehicle, you’ll need to regularly maintain parts like brakes, tyres and wipers, however you won’t need to worry about topping up engine oil or replacing parts like cam belts. The main parts on an electric car, like traction battery, drive motor and associated electronics, require little maintenance.
Many small business owners who have responsibility for the day to day running of their vehicles, tend to purchase their vehicles outright as they believe it to be more beneficial to own their own assets. Turning to Contract Hire could unlock a wide range of operational and financial advantages including tax efficiency and increased available capital. It also removes the risk and instability involved with the vehicle’s future residual value. An EV’s reduced need for maintenance can also help many small businesses who rely on the continuous running of their vehicles, as it will reduce any downtime in their fleet.
How does TCO work?
To gain an insight into the overall potential savings, a Total Cost of Ownership (TCO) analysis approach should be used. Calculating a vehicle’s TCO provides a granular picture of the financial impact on your business providing a vehicle over its whole lease.
The pie charts below are based on the TCO from a basket of 15 vehicles for each powertrain. Based on Contract Hire Full Maintenance with a contract term of 36mths / 20,000 miles per annum. Fuel costs are based on 75% business miles using Advisory Fuel Rates (AFR’s) and PHEV MPG figures have been reduced by 75% to reflect real world conditions. Finally, this TCO is effective from April 2022 – inclusive of the Health and Social Care Levy.
This type of calculation can show that, depending on the vehicles you have on your fleet, the savings available by changing to BEVs are tangible both financially and environmentally. However when choosing to move to BEVs, unlike ICE alternatives, there isn’t a one size fits all option for your drivers. BEVs will be viable for some of your drivers, but maybe not all. At the moment, care must be taken when drawing up your fleet policy to ensure the right fit.
What about the statutory fuel rise?
In April 2022, the statutory fuel rise increased by 54%, increasing electric prices, which could mean there are some worries around whether an electric vehicle is still a cost-efficient choice. This is especially true with the announced Fuel Duty decrease of 5p (6p with VAT) announced to combat rising fuel prices.
Using Contract Hire Full Maintenance with a contract term of 36mths / 20,000 miles per annum across 28 vehicles, we have worked out the cost increases across both ICE and EV vehicles. Fuel costs are based on 75% business miles using Advisory Fuel Rates (AFR’s) and PHEV MPG figures have been reduced by 75% to reflect real world conditions.
TCO of an ICE vehicle
TCO of an BEV vehicle
As you can see, even with the increase in electricity and the decrease in fuel duty, EVs still have a lower TCO than ICE vehicles.
Our view
Calculating the true TCO of your fleet and identifying those drivers who would benefit from a BEV can be challenging. It’s important to take a rounded view of what powertrain would suit you, including how detrimental downtime would be to your business. If you’d like to discuss this further, please contact your Account Manager or our Business Intelligence and Consultancy Team who are able to assist you in producing a TCO analysis to help shape your future fleet policy.
About the contributor
Tash Turner
Fleet Consultant
Specialisms: Financial modelling, Total Cost of Ownership, Fleet Optimisation and Mobility
Tash has over 12 years’ industry experience, including previous roles in Strategic Account Management at KINTO UK and Venson Automotive, working with a variety of private, public and not for profit businesses with both car and van fleets varying from 50 – 5,000 vehicles.
Tash joined ALD in 2021, bringing a wealth of experience and proven ability in working in partnership with customers to identify cost-saving opportunities, share best practice and advise on future strategic fleet decisions. She has considerable experience working with businesses to identify the most suitable funding methodologies as well as enabling and supporting the creation of robust, adaptable and suitable fleet polices, including integration of alternative fuels and Total Cost of Ownership (TCO).
Email: tash.turner@aldautomotive.com
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Email: roadtozero@aldautomotive.com
Visit: www.aldautomotive.co.uk