Managing financial performance in today’s complex and rapidly changing business climate is crucial for any fleet executive.  To provide insight to management, there is an increased demand for organizations to offer perspective on business trends and key performance indicators. Financial planning, forecasting, and budgeting are critical components that drive business performance and guide strategic decisions.  This is generally a time-consuming and inaccurate process for many companies due to flawed analysis or logic. This is especially true in the transportation industry where many managers base their decisions more on anecdotal evidence rather than actual data. New forecasting techniques and access to accurate data on fleet performance are making the forecasting and budgeting process a more accurate and PRECISE tool.

The faster pace of today’s business is rendering traditional budgeting inadequate as companies find that real-time cost assessment and technology advances provide reliable metrics for decision-making.  The need for agility is fueling this transition.  Companies need to react rapidly to changing regulations, budding innovations, new competition and erratic economic events. A rolling forecast allows companies to predict the impact of these changes, take actions to mitigate unforeseen events, and act quickly when new opportunities arise. To move to a rolling forecast effectively, successful organizations leverage internal and external indicators in their planning and forecasting, which improves results and accuracy.

Finance departments have many different metrics to evaluate because they must formulate a holistic plan rather than just on a departmental level.  They typically calculate return-on-investment (ROI) to gauge if an investment is a sound business decision and how it will affect the company as a whole.  When approaching Finance for capital needed to keep your transportation fleet operating at peak efficiency and looking its best, the fleet manager must have their I’s dotted and T’s crossed; but they will also be well served knowing the difference between ROI and the return-on-capital-employed (ROCE).  This measures profitability against the amount of capital used.   A high ROCE indicates a more efficient use of capital and should be higher than the company’s cost of capital or debt.  The ROCE trend over the years is an important indicator and measure of overall corporate performance. 

Armed with this information, the fleet manager can more readily convince the finance manager that their request is not only an action that will reduce operating costs but is a sound financial decision as well.  Consider this simple example of how to use Return On Capital Employed to gain access to capital to upgrade and modernize your fleet:

Assume you have a five-year-old truck that originally cost $100,000 and was depreciated over seven years.  Its current book value would be based on the remaining two years with an unamortized balance of $28,000.  Also assume its fair market resale value is $28,000.

Next, confirm that a new truck would improve your fuel economy by .8 miles per gallon and reduce maintenance expense by nine cents per mile (year 1 maintenance vs year 6 maintenance) and that the truck is operating 100,000 miles per year.  The operating cost reduction would be about $14,000 (fuel $5,000 and maintenance $9,000).

Converting from purchasing the equipment to an operating lease, the company would be taking on a five-year lease payment obligation with a net present value of approximately $90,000.  This would be offset by the sale of the old truck at $28,000, leaving a balance of capital employed of $62,000.  The year 1 operating savings of $14,000, when compared to the capital employed of $62,000, yields a 22.5% return on capital employed.  Approaching the finance department using this perspective gives fleet managers better access to capital and a newer, more productive fleet.