Car Allowance Pitfalls
The business imperative of cost control and reduction through-out any organization has never been more important. Many companies providing company vehicles for sales and service employees can be tempted to consider moving to a car allowance program as part of a cost reduction strategy. Greg Vercaigne of GDV Fleet Solutions explains why it pays to look before leaping into a car allowance model.
Company car programs often attract a lot of scrutiny and with good reason; they are among the top expenses for companies who offer them.
Switching from a company provided car to car allowance is often seen as the low hanging fruit when reducing operating expenses. Companies seeking to reduce expenses should ensure they are seeing the big picture. A car allowance program is not without its challenges. These should be considered before making the switch from a company provided program.
The reality of a car allowance program is that drivers come to see the allowance as part of their income, as opposed to reimbursement for business use of their own vehicle. As a result, they often neglect to account for vehicle operating expenses such as maintenance and insurance, leaving the company with a whole new set of challenges.
For example, since insurance premiums are higher for vehicles doing business mileage, drivers may not have purchased the policy with adequate coverage. The company now has exposure it didn’t have before in an accident occurring during business driving.
Similarly, drivers on a car allowance program must pay retail for fuel and maintenance. Moving to an allowance places all the autos expenses on the employee. If the driver has not budgeted adequately, the employee may well be left with costs over and above the allowance and chose not to have the work done. If a vehicle breaks down on company time and there is a large repair cost, the employee may look to the company to pick up all / some of the expense. Should the company go ahead and help the employee in order to get him or her back on the road? The company needs to devote time to a negotiated solution as well as absorb the unexpected cost. Does it set a precedent going forward? Would policy need to be established?
Drivers have the option to lease their vehicle. Retail lease rates are often based on mileage restrictions designed for personal as opposed to commercial use . Drivers are responsible for paying out any penalty at the end of the lease. It’s not unknown that drivers on a Car allowance cut back on business travel to resolve the situation.
If the allowance program is a cents/km mileage reimbursement program, many companies find they need to devote management time to track drivers for claiming additional mileage, known as “padding”.
Companies using car allowance can risk losing control over the vehicle type and age, resulting in constant negotiations with employees over the type and condition of the vehicle the employee is driving.
Car allowance amounts must be constantly reviewed. Maintaining fair and equitable allowance amounts can be challenging and time consuming. Fuel costs and repair shop labour rates can vary significantly, nationally and regionally Establishing monthly allowance amounts with this in mind is a challenge If monthly allowance amounts are too low, it’s a dis-incentive for potential new hires. If the allowance is too rich, it could eat up the financial advantages of going to a car allowance in the first place. A lot to consider.
While a switch to a car allowance for some companies may provide an immediate solution to the expense reduction goal, it is not a panacea. It is an alternative that has its own set of challenges and associated expenses. Moving from a company supplied vehicle to a car allowance program doesn’t take a leap of faith, it takes a thorough examination of all the factors to make a decision that is right for your circumstances.
GDV Fleet Solutions has helped Canadian companies decide what vehicle solution is best for them for over 20 years. They can be reached at greg@gdvfleetsolutions.ca.
Source: https://www.fleetbusiness.com
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