Knowing the costs and expenses of a business is the first step towards profit maximization, which is the ultimate goal. In the fleet business, determining the total cost of ownership enables you to optimize fleet performance and returns.
The total cost of ownership (TCO) refers to an all-inclusive cost of the vehicles from the purchase price to the maintenance and operation.
Below is a detailed guide on how to calculate the TCO of your fleet. But first, let's find out why TCO is key to your fleet business management.
Importance of TCO in Fleet Management
TCO is a vital decision-making tool that can help in improving the performance of your fleet. It helps in;
- Budgeting and planning
- Fleet analysis
- Fleet selection
- Fleet lifecycle management
- Fleet leasing
Factors to Consider When Calculating Fleet TCO
Even though there's no generally accepted formula for calculating fleet TCO, there are some standard costs that you ought to include in your calculations. Also, calculating TCO requires a keen eye and topmost accuracy because a slight error can give misleading information about the actual cost of your assets, thus leading to poor financial decisions.
So let's get started:
These are the costs of purchasing the vehicles and operationalizing them. Most businesses operating small and medium-sized fleets usually overlook this metric, especially those that acquired their fleets using cash. But the truth is, accounting for the capital cost (regardless of your fleet size) is equally vital in the sense that it helps you determine how things would have been had you used the funds differently.
When calculating the capital costs, you'll find out that the larger the fleet size, the lower the TCO per unit. Why so? Large fleets typically have bargaining power with dealerships and can acquire the vehicles at comparatively lower prices. Small and medium-sized fleets can also leverage economies of scale by practicing preventive maintenance or building an effective fleet safety program.
Right from the time of purchase, the value of your vehicles usually begins to depreciate. Knowing and managing your assets' value is critical in the fleet business. It helps you determine your vehicles' current worth in an open market, and the profit you can make from selling the vehicles before the operation cost exceeds revenue generation.
Incorporating asset depreciation into your TCO calculations enables you to determine the fair wear and tear, which describe the extent of your vehicles' degeneration. Tip: when on the market for new vehicles, go for those with lower depreciation rates as they will guarantee you a greater or reasonable price when you want to sell.
Maintenance costs are directly proportional to asset depreciation, i.e., the more the vehicles age, the more they need for maintenance. A 2017 study found that it costs $14.80 to maintain a vehicle that has been in service for a year. This increases in the subsequent years, and it costs at least $68.62 to maintain a vehicle with three or more years of service.
But you'd be mistaken to think that aging is the only contributory factor to maintenance costs. Other aspects like asset quality, driving behaviors like over-speeding, reckless breaking, and overloading may also raise maintenance costs. We also recommend you include the downtime costs in your TCO calculations.
As we hinted earlier, there's no generally accepted formula for calculating TCO. Acquisition costs, asset depreciation, and maintenance costs are just the tip of the iceberg. Other factors to include in your measurement include licensing & tax, fuel costs, insurance costs, residual value, and many more.
We understand that this TCO calculation process can be overwhelming and task-demanding. But with our customizable cost calculator and immense expertise in fleet management, we can help you determine the real value of your fleet. Contact us to learn more!