Document

Report
 Equipment Cost Characteristic
 Fleet Management Basics (Enterprise)
 Cost, Flexibility, Replacement, Industry knowledge
 Job Cost
 Equipment Financing (Wells Fargo Equipment Finance)
 Glossary of Terms
 Lenders, Loans vs leases, Tax issues
 CARB Regulations
* Equipment Cost and Characteristic
• How big is the impact?
ABC Construction Company
Contract Revenues
November
5,000,000
XYZ Construction Company
%
100.0%
Contract Direct Costs
Labor
Burden
Material
Subcontracts
Equipment
Rented Equipment
Loss Claims & Safety Chgs
Other Direct Costs
Tools and Supplies
Total Contract Direct Costs
Gross Income
Total Indirect Costs
Net Income
%
100.0%
Contract Direct Costs
810,000
16.2%
526,500
10.5%
832,600
16.7%
1,300,000
26.0%
350,000
7.0%
56,300
1.1%
5,000
0.1%
21,500
0.4%
62,000
1.2%
------------------ -------------3,963,900
79.3%
------------------ -------------1,036,100
20.7%
Labor
Burden
Material
Subcontracts
Equipment
Rented Equipment
Loss Claims & Safety Chgs
Other Direct Costs
Tools and Supplies
350,000
7.0%
410,000
8.2%
------------------ -------------760,000
15.2%
Local management
S,G,&A
276,100
5.5%
========= =======
Net Income
Indirect Costs
Local management
S,G,&A
Contract Revenues
November
5,000,000
780,000
15.6%
507,000
10.1%
890,000
17.8%
620,000
12.4%
950,000
19.0%
110,000
2.2%
5,000
0.1%
21,500
0.4%
75,000
1.5%
------------------------ --------------Total Contract Direct Costs
3,958,500
79.2%
------------------------ --------------Gross Income
1,041,500
20.8%
Indirect Costs
Total Indirect Costs
400,000
8.0%
390,000
7.8%
------------------------ --------------790,000
15.8%
251,500
5.0%
============ =======
 Equipment Cost Characteristic and Strategy II
 What Characteristic?
 Ownership vs Operation
 What goes into the cost pool?
 Operation Costs  Scheduling/Staffing
 Preventative Maintenance
 Fuel, Oil, Parts, Tires, Wash
 Repairs
 Major Maintenance
 Ownership Costs – (no active jobs)
 Depreciation
 Purchase, Lease/Financing costs
 License, Insurance, Fees, Registrations
 Labeling, Setup
 STORAGE – Yard costs
 Additional Costs / Benefits
 Income Tax
 Inflation
 Opportunity Cost
Fleet Management
 Does Fleet Management make sense for your
business?
The Basics of Fleet Management
An Analogy to the Finance Profession
Fleet Management is similar to a Tax Professional
A company can do it alone without professional advice
 But it’s likely to cost you more
Tax Professionals implement proper cash flow planning techniques and
ensure all of the proper deductions for a constantly-changing tax code
A vehicle fleet manager designs a flexible fleet and strives for the best
economics for a given business
6 Elements of Cost of Operating a Fleet
Vehicle Expense
•Depreciation (Acquisition less resale)
•Interest
•Sales Tax & Registration
Operating Expense
•Fuel
•Maintenance and Repairs (includes downtime)
•Insurance
Additional Economic Considerations
•Income Tax
•Cost of Capital
•Inflation (budgeting)
Additional Considerations
 Decision Maker’s Time
 Employee/Admin Involvement
 Image of Fleet Vehicles/Company
 Driver Satisfaction/Productivity
 Safety Concerns
 Downtime
The Building Blocks of Fleet Management
The Value of a Replacement Strategy
One of the important elements of Fleet Management is knowing the economics and the
customer’s business goals of when to replace vehicles
A fleet manager monitors the following items:
 Used vehicle prices
 Maintenance and downtime considerations / customer service issues
 Fuel and fuel economy standards
 Appearance and branding
 Employee morale
 Administrative time
 Vehicle incentives
The structure of the lease term provides an automatic trigger to analyze the hold versus
replace decision.
Replacement Analysis at 4 Years / 100,000 miles
Cost to Hold
Cost to Replace
$0
$0
$23,938
($9,300)
Vehicle Sales Price in 4 years
($1,000)
($9,300)
Depreciation
($1,000)
$5,338
Sales Tax
$0
$1,436
Interest Expense
$0
$2,088
Total Acquisition Cost
($1,000)
$8,862
Fuel
$25,159
$21,018
Preventative Maintenance
$7,029
$5,565
Vehicle Breakdowns (Non-Preventative)
$7,209
$0
Insurance
$4,800
$4,800
$0
$1,736
Total Operations Cost
$44,197
$33,119
Total Cost
$43,197
$41,981
Vehicle Acquisition Price
Sale of First Vehicle
Management Fee
*Does not include any costs related to
additional downtime.
Total Cost for 1 Vehicle – with Replacement
Cost to Manage
Cost to Outsource
Vehicle Acquisition Price
$24,938
$47,876
Vehicle Sales Price
($1,000)
($18,600)
Depreciation
$23,938
$29,276
Sales Tax
$1,496
$2,872
Interest Expense
$2,618
$4,176
Total Acquisition Cost
$28,052
$36,324
Fuel
$44,243
$40,098
Preventative Maintenance
$12,800
$11,130
Vehicle Breakdowns (Non-Preventative)
$8,643
$0
Insurance
Management Fee
$9,600
$9,600
$3,473
$75,286
$2,000
$64,301
$400
Total Cost: Pre-Tax
$105,338
$101,025
Average Annual Spend
$13,167
$12,628
52.7¢
50.5¢
Total Operations Cost
Administrative Time
Cents Per Mile
After-Tax NPV (discounted at 5%)
$57,400
2.3 X’s acquisition price
$54,900
Questions to Ask to Determine if Fleet
Management Makes Sense to My Business:

Is an additional source of capital important to my business?

Do I know my total spend for my fleet?

Is it difficult to dispose of vehicles during a business downturn?

Do I have idle vehicles at different points in time?

Is vehicle downtime a significant detriment in my business?

Who approves maintenance invoices and what experience does that person
have with the automotive industry?

At what mileage intervals are your vehicles being serviced for oil changes?

Do I track maintenance expense on a vehicle-by-vehicle basis?

What is my plan if fuel prices continue to rise?

Is my business equipped to analyze the new products (i.e., Hybrids, compressed
natural gas, electric, etc.) that are coming to market?
The Value of Replacement
One of the important elements of Fleet Management is knowing the economics and the
customer’s business goals of when to replace vehicles
A fleet manager monitors the following items:
 Used vehicle prices
 Maintenance and downtime considerations / customer service issues
 Fuel and fuel economy standards
 Appearance and branding
 Employee morale
 Administrative time
 Vehicle incentives
The structure of the lease term provides an automatic trigger to analyze the hold versus
replace decision.
• 4 Rules for Capital Lease Accounting
•
•
•
•
Title passes to Lessee automatically by EOL
Lease contains option to purchase at EOL for substantially less than FMV
Term is > 75% of the useful life
Present value of lease payments is greater the 90% of FMV
• Accounting Treatment - Capital
•
•
•
•
Same as loan, Liability & Asset capitalized (PV of future Pmts) (is it?)
Interest + depreciation expense equivalent to lease payment
Cash payment maybe more than lease payment
May have existing debt covenant / collateral restrictions
• Accounting Treatment - Operating
• Full Lease payment is expensed
• Off balance sheet, but PV of future payments required in disclosures
• Not in Loan covenant calculations
• Fair Market Value lease
• End of lease options: Return, Renew, or Purchase at FMV
• Dollar Buyout Lease
• Capital Lease, purchase for $1 at end of lease,
•
• Wrap Lease
• Roll existing lease into new lease with added equipment
• Sale-Leaseback
• Within 90 days, provide proof of payments, invoices, titles – can be Dollar Buyout or FMV
• Open-End Lease
• Renewable with wrap
• Term – Period over which regular payments are made
• End of Lease, Term (EOL, EOT) – Options for returning or acquiring assets
• Lease Rate Factor – multiple of Asset value that calculates payment
• Ex: lease rate factor of .021 x 1,000,000 = $21,000 monthly payment
 Indexing – lease rate is tied to interest rate for timing, ex: Libor or Fed Funds
 Bargain Purchase Option – substantially less than FMV
 Closed-End Lease – no purchase Option, Return only
 Finance Lease – Capital Lease
 Guaranteed Residual Value – Lessor receives fixed amount EOL
 Ex: TRAC lease – Terminal Rental Adjustment Clause – lessee guarateed
 Tax Lease – Lessor takes on Tax benefits of ownership e.g. Bonus Depreciation
Wells Fargo Equipment Finance, Construction Group Business Overview
Work with construction specialists who have in-depth knowledge of the industry and extensive experience
creating customized equipment financing solutions
Target Markets
Distribution Channel
Wells Fargo Construction specialists regularly
finance equipment used for the following
applications:
 Highway/street construction
 Site preparation and excavation
 Concrete /asphalt production and paving
 Utility construction
 Bridge and tunnel construction
 Sand and gravel production/quarry operations
 Crane and equipment rental
 Dealer inventory and rental fleet
CMFA
Direct to equipment end users
 Direct Territory Managers
 National Contractor Program
Equipment distributors
 Direct Territory Managers
 Inventory Territory Managers
 National Account Territory Managers
Manufacturer programs
 National Accounts – Over 25 active programs
 Retail
 Loans & Leases
 Inventory
 Private Label
20
Products for Equipment End Users
Product Category
Term Debt
Leases
CMFA
Details






Fixed and floating rate loans
Installment sale contracts
Cap Ex Lines of Credit
Refinances
Working Capital Loans
Transaction sizes from $75 Thousand to over $100 Million
 Operating and Capital leases
 Walk away options
 Fixed price purchase options
 Early buyout options
 TRAC & Split Trac Leases
 Sale and leasebacks
 Synthetic Leases
 Transaction Sizes from $150 Thousand to over $100 Million
21
Products for Equipment Distributors
Product Category
Inventory
/Rental Fleet
Non Inventory
Loans & Leases
CMFA
Details






Fixed and floating rate products
3 to 12 months interest only with term out extensions
Rental Fleet Installment Transactions
Rental Fleet Leases
Manufacturer and bank roll over lines
Refinances
 Loans and Leases for capital equipment including:
 Service and Delivery Trucks
 Shop Equipment
 Computer and IT Systems
 Company Vehicles
22
Wells Fargo Equipment Finance
Know your options
Loan
Lease
Down payment
 May require some down payment (varies by equipment
type)
Down payment
 Typically 100% financing
Risk of obsolescence
 Transfers risk of obsolescence to a Lessor
 No obligation to purchase asset at end of term
Risk of obsolescence
 Through ownership, a borrower bears risk of asset
devaluation as a result of technological advances
Tax deductions and budgeting
 A Lessee may claim the entire lease payment as an
expense, thereby reducing taxable income
 Flexible payment terms and interim financing
Tax deductions & budgeting
 The borrower may claim a tax deduction for depreciation
as well as the interest portion of the loan payment
 Payments can be based on fixed or floating rates, fixed
principal and interest or fixed principal plus interest
Financial reporting
 If the lease qualifies, neither the asset nor the
corresponding liability appears on the balance sheet,
which can improve financial ratios
Financial reporting
 FASB 13 requires that an owned asset appear as an asset
with a corresponding liability on the balance sheet
CMFA
23
Lender considerations when reviewing a financing request
Lessee/Borrower Background:
 Time in business,
 Key management stability
 Customers
 Position in the industry
Financial Package Typically Required by Lender
 Most recent 3 years annual financial statements

Industry:
 What’s currently going on in the industry


Financial Analysis:
 Quality of Financials Statements,
 Cash flow/debt service,
 Trends (Balance Sheet and Income Statement),
 D & B reports,
 Credit Bureau Reports,
 Pay history with Lender
CMFA

24
(would need associated tax returns if statements are
not a CPA review or audit)
Most recent YTD interim financial statement with
comparable to the same period for the previous year
Most recent Work In Progress report
Equipment to be purchased and reason for acquiring
(manufacturer, make and model , and cost, itemized)
Company and ownership background & structure
• Getting Cost from the Left side to the right side
• Each piece is a business
Cost
Types
DEPT
Equipment
Job
10111
Equipment
Job
10112
Equipment
Equipment
Yard
• Methods for charging pieces >> LEFT SIDE
• Direct costs – Charge to Piece or to WO which charges piece ?
• Fuel (Gas cards)
• Repair workorders
• PM workorders
• Labor timesheets charge WO or Equipment
• Depreciation
• Financing
• Licenses, Fees, Registrations
• Indirect Cost – Allocate costs to pieces based on…?
• Fuel (without reporting)
• Insurance – Auto maybe direct, yellow iron not so much
• Dispatch Labor
• Unapplied Mechanic time
• Unapplied Yard costs
• Methods for charging jobs >> RIGHT SIDE
• Usage & Ownership rates
• Which hours count? Who owns it when it’s off site?
• Minimum hours per day
• Don’t overthink it
• Labor-Based OH Rate Allocations
• How well does equipment match your crews and work type?
• Material Based OH Rate Allocations
• What is the Equipment and how well does it match?
• Unit Based costing
• Uniformity of work unit – LF of Asphalt Pavement?
 State of California AB-32 - Low Carbon Fuel Standard
 Affects all carbon fuel consuming industries
 Multiple regulations affecting the construction industry
 Enforcement and fines are issued by local ARB districts
 Fines can be as high as $10,000 per day for violations
 Scheduling of equipment replacement or retro-fitting is critical
 New regulations coming into effect will increase equipment budgets by as much
as 50%
 Series of deadlines which vary by Fleet size and Equipment size
 The Construction Industry is subject to many regulations under AB-32,
but mainly these 6:
 Periodic Smoke Inspection Program (effective 7/1/1999) – On-Road Diesel Vehicles
 Tire Inflation Regulation (effective 9/1/2010) – On-Road Vehicles
 MRS - Truck and Bus Regulation (effective 1/1/2012) - On-Road Diesel Vehicles
 Heavier vs Lighter – 26,000lb GVWR
 LSI - Large Spark Ignition Engine Regulation (effective 1/1/2009) - Off-Road Gas,
Propane & CNG Engines. Forklifts et al.
 PERP - Portable Equipment Registration Program (effective 1/1/2006) - Portable
Diesel Vehicles (non-self-propelled). Air Compressors et al.
 In-Use Off-Road Diesel Vehicle Regulation (effective 1/1/2014) - Off-Road Diesel
Vehicles. Backhoes et al.
 Idling Policy (effective 6/1/2008) & 5 minute limit
 Fleet Labeling & Reporting (effective 1/1/2009)
 Fleet size – Small < 2,500 hp; Large >5,000 hp
 For More Information:
 www.arb.ca.gov/html/lawsregs.htm

similar documents