Company cars: How to keep costs down
Look beyond list prices and lease rentals if you want to save money in the long run, advises Mark Gallimore
In today’s 24-hour consumer culture, it’s easy to be seduced into believing that the best price for anything is automatically the lowest.
But at the same time we also know that paying a bit more for, say, a good pair of shoes that’ll last for years is usually more economical than buying several cheaper pairs.
And, when it comes to complex, relatively expensive assets like company cars, the distinction between price and value becomes even more important – especially to cash-conscious small businesses.
If cars’ prices were a good guide to value – in other words what the total cost of ownership would be for your business – life would be easy. Unfortunately, it isn’t. Low priced cars can turn out to be very bad bargains, while more upmarket models can be surprisingly cost-effective in the long run. Or vice versa.
Price is an unreliable indicator
The bottom line is that the price on the sticker tells you almost nothing about what you’ll get out of the tin.
So, if list prices are not your friend, what about lease rentals? Contract hire is extremely popular because it spreads the cost of ownership and leaves the vehicle’s resale value risk with the leasing company.
On the face of it, lease rentals do appear to be a reasonably reliable guide to lifetime costs because they are based on the difference between acquisition cost and residual value. Therefore, they take account of the fact that some models depreciate more quickly than others.
And, because you can also usually have the cost of maintenance, breakdown cover and routine tyre replacements included in the rental, you can be pretty sure of the total contract cost from the outset, as long as there’s no excessive mileage or unfair wear and tear when you return the car.
A better way?
That’s why a lot of companies base their business car decisions on lease rentals. But are they really a more reliable guide to value than list prices – or is there a third, better, way to choose vehicles for your business?
Let’s look at some examples and ask what makes them winners or losers when it comes to actual ownership costs.
First up, we have two cars with the same list price of £12,545: a Nissan Micra Acenta 1.2 litre petrol and a Nissan Note Visia 1.5 litre diesel. Similar models, same price, but the diesel Note costs a little less to lease and is £1,300 cheaper to run for three years.
Moving up a couple of classes, we could compare a £17,980 Ford Mondeo Edge with a £20,685 MINI Cooper Countryman. Which of those should a value-conscious company choose? In fact both boast an identical contract hire rental of £328 a month. Even so, it may surprise you to know that the upmarket MINI actually costs £2,124 less to run over three years.
Finally, let’s take another Mondeo and a BMW 3-Series. In this case, a £23,125 Mondeo Titanium 2-litre diesel and a £28,455 BMW 320d EfficientDynamics, also a 2-litre diesel. Surely the BMW cannot be cheaper?
Whole life costs
It’s true, it isn’t. Leasing the BMW will cost you £48 a month more than the Ford. But when you take all the other ‘whole life’ cost savings on the BMW into consideration, it works out at a mere £115 more expensive over three years, which is less than the cost of one return rail journey from Bristol to London.
Imagine if one of your employees discovered that that he’d missed out on driving a BMW for three years just to save the business 11 pence a day!
To make sense of these apparent contradictions, we need to turn to ‘whole life cost’ calculations (or WLCs for short). WLC calculations, which are offered by good leasing companies and some major consulting firms, take account of costs that even all-inclusive rental quotations ignores. As a result, they give by far the most accurate picture of a car’s real lifetime running costs.
What’s in a whole life cost?
So what’s in a WLC? Well, for starters there’s fuel, which is the biggest running cost after depreciation. The cars in the examples above would use between £1,200 and £2,000-worth over three years and 60,000 miles.
Perhaps surprisingly, the cheapest car to fuel is the BMW 3-Series. That’s thanks to EfficientDynamics, which is a package of technologies designed to reduce fuel consumption and cut CO2 emissions. It gives the 68mpg BMW a £10 a month fuel cost advantage against even the reasonably frugal (53mpg) Ford.
Talking of CO2 brings us to the other major driver of company vehicle costs: tax. Every aspect of company car tax is now linked to CO2.
That includes better writing-down allowances for green cars (reflected in slightly lower contract hire rentals) and lower car benefit tax rates. Employers’ NIC payments are proportional to the tax the driver pays so, again, greener cars cost companies less and that is reflected in the WLC calculation.
Most reliable guide
In short, WLCs are far and away the most reliable guide to the real cost of business cars. They’re usually expressed as an all-in pence-per-mile running cost figure for each car, and many of our customers use them to organise up their car choice lists. For example, the entry grade might be set at a WLC of 18-21ppm; the next grade at 22-25ppm and so on.
WLCs can make your fleet budget go much further than you imagine. One Alphabet customer upgraded its 50 Toyota Auris pool cars to MINI Countrymans, each priced at £2,500 more. But, thanks to greater fuel efficiency, lower CO2 and better depreciation, the MINIs will save the company £49,000 over three years.
So the next time you’re in the market for a new vehicle it’s worth getting the complete picture with whole life costs.
Mark Gallimore is head of corporate finance at fleet funding specialist Alphabet