Fleet management plays an integral role in many corporates and municipalities. These departments are usually multi-faceted and require a diverse range of skills, however, they can also present many challenges.

One of the biggest debates remains: Is it better to lease or buy fleet vehicles? This is an important decision to consider as owning and leasing company vehicles impacts the company cash flow, income statement, and balance sheet.

One of the major considerations in the ‘lease versus buy’ decision is the availability of quality fleet management services and the coordination of those services should multiple suppliers be necessary. This is where a fleet manager becomes indispensable.

Experts in the transport sector believe that leasing fleet vehicles has advantages over buying for the following reasons:

1. You only pay for the usage of the vehicle:

• When leasing a vehicle you pay a lease rate for the usage of the vehicle, an administrative fee and costs for other optional services that a leasing company provides.
• The vehicle usage is calculated from its depreciation during the term of the lease. This means that one does not ever pay the full purchase price of the vehicle.

For example: A vehicle’s capitalised cost is R25 000 and the estimated vehicle value at the end of the lease term is R7 000, you pay the difference of R18 000 broken up into monthly payments. This results in predictable budgeting and a lower monthly payment.

2. If you’re looking for predictable cash flows, then leasing is a suitable option. Avoid diverting working capital away from the business or creating more debt. Leasing releases working capital otherwise frozen in fixed assets.

• Open-end TRAC leases have payments that are somewhat predictable and depends on whether the interest rate is fixed or floating. However, closed-end or hybrid leases might be even better, with equal payments for the entire lease term, and the residual value is guaranteed by the lessor.

3. Why invest in a depreciating asset?

Vehicles are highly depreciable, therefore getting a better return by investing capital somewhere else. With leasing, cash can be put to better use, like growing a business.

4. Cycle vehicles at the optimal time.

When one leases a vehicle, they will be able to cycle out vehicles at the optimal time and avoid excessive maintenance costs, if done correctly.

The older vehicles get the more work it requires to keep it on the road. Also, if the vehicle is bought, costs will spiral as it ages.

5. There’s a possibility of off-balance sheet reporting.

Under current US Generally Accepted Accounting Principles (GAAP), open-end/ terminal rental adjustment clause (TRAC) and closed-end leases can be considered operating leases. This means:

• The lease does not have to appear on your company’s balance sheet.
• It reduces your company’s visible debt.
• The company looks more attractive to investors and lenders. It all boils down to liquidity, profitability and trends.

6. Better total cost of ownership is achievable.

When using a fleet management company, a fleet is handled by experts that know how to strategically manage a vehicle’s lifecycle for you/your company and can provide a cost analysis as well.

7. Lower your administrative burden.

There is the opportunity to be free of financial administrative tasks with leasing. Capital expenditure requests, even though budgeted, require scrutiny, requisitions, vouchers, purchase orders, etc. Leasing shifts that burden to the lessor. All of the ownership-related accounting is taken off of your to-do list.

When you consider the lifecycle costs of a fleet – purchase costs, vehicle management, administration, title and registration, fuel, insurance, maintenance, resale – leasing will save a company time to focus on growing the business.

Other important finances to consider:

There are several reasons for leasing and owning fleet vehicles that include:

• Cash flow: If the company is looking for predictable, even cash flows, leasing is more practical. Some open-end leases have even payments in annual increases, however closed-end leases prove to be better with equal payments for the entire lease term. Ownership has very different funds flows, however if cash flow is not an issue, and the net present value is stronger, buying works.
• Balance sheet: When leases qualify as operating leases, lease payments can be treated as an expense on the company income statement and deducted with other expenses (such as rent, utilities, and salaries). Owned fleets require balance sheet entries — an asset offset by a corresponding liability. If the fleet is of substantial size, the company may prefer to lease, which will keep vehicles off the balance sheet and eliminate any impact on financial ratios, which are important to banks and other creditors. If the fleet is smaller, ownership can be considered as such ratios won’t be materially impacted.
• Depreciating asset: Vehicles depreciate in value over time as the more they are used, the lower their value at any point in time. Some companies’ financial philosophies call for leasing depreciating assets, and owning those that appreciate.
• Hassle-free: Leasing can be a hands-off transaction as the lessor handles ordering, delivery, resale etc. under a single master agreement. There are however some large national fleet dealers who can provide similar services, as well as purchase or disposal programs offered by fleet management companies.