Question

Do you think organizations that have a fleet should have a replacement plan in place? Could fleet replacement plan benefit and save an organization cost and should tax implications be a part of that plan?

Answer 1

Let us start with assumptions and imaginations.

Imagine you own a fleet of cars that are provided to organizations on rent for their employee commute purpose. The cars are running fine. After their normal useful life which is little over 5 years, the cars would start to demand more operating costs. Their mileage would reduce, their wear ant tear rate would accelerate, servicing cost would be very high. Imagine the total impact of the entire fleet on the business. You would not be able to increase prices relatively to cover these costs.

Now imagine the same situation with a little twist. You had a backup plan created in advance considering the nature of the assets used in your business. You had a really smart plan. You had categorized your cars in groups and were replacing them on group basis. This helped you manage both the capital expenses as well as operating expenses. The total impact in this case would not bother you because of having a perfect replacement plan.

Learning from the above situation, I feel it is very vital for organizations having a fleet to have a well defined fleet replacement plan to avoid any situations as described in situation 1 above.

A good and highly effective Fleet Replacement Plan will save a lot for an organization directly and indirectly explained as follows

1. Directly - It can save a lot in operational costs and maintenance costs. Young vehicles operate more effectively and efficiently than a vehicle that has crossed its useful life, thus resulting in better performance in lower costs.
2. Indirectly - Imagine a lot of break downs while on job. This would harm an organization's reputation and may result in termination of contracts or contractual penalties for delays and inconvenience.

Not only in Fleet Replacement plans, but in every decision that is related to the capital, tax implications must be taken care of. In many scenarios tax benefits are available. All those tax benefits and compliance must be adhered to.