How to calculate Total Cost of Ownership (TCO)
When it comes to managing a fleet, one of the metrics you might find useful to understand is the Total Cost of Ownership (TCO).
This takes into account all of the costs related to owning and operating a vehicle across its lifespan. From vehicle acquisition and fuel costs to maintenance, insurance, and depreciation, TCO gives you a holistic picture of your fleet's operational expenses.
In this this blog post we’ll break down the process into manageable steps, ensuring you have all the knowledge to calculate TCO for your fleet accurately and confidently.
How can you calculate the TCO of your fleet?
Calculating TCO is all about accurately understanding and adding up all the costs associated with operating your fleet. It's a process which requires a methodical approach looking beyond ‘simple’ purchase or lease costs. Here's a general approach to help you navigate this process:
1. Identify cost categories
The first step is to identify all the relevant cost categories that apply to your fleet. These commonly include vehicle acquisition, fuel, maintenance, insurance, financing, taxes, and depreciation.
2. Gather data
Next, you need to gather as much data as possible for each cost category. This could involve collecting invoices, examining financial statements, and tracking actual or estimated values. The more accurate your data, the more reliable your TCO calculation will be.
3. Calculate costs
Now it's time to start crunching numbers. For each category, calculate the costs based on the data you've collected. This should cover both direct expenses (like fuel purchases) and indirect expenses (like administrative overhead).
4. Determine lifespan
To get an accurate TCO, you also need to estimate the expected lifespan of the vehicles in your fleet. This estimation can be based on factors like typical mileage, wear and tear, and the vehicle's make and model.
5. Sum up costs
For most vehicles, once you have established the different lifetime cost types, the calculation itself is very simple (see below).
After calculating the costs for each category, add them all up over the estimated lifespan of the vehicles. If you own the vehicle and intend to sell it on at some point, work out an estimate of the anticipated resale income and subtract this from the costs. This will give you the TCO for your fleet.
6. Analyse and evaluate
With your TCO data in hand, you can now analyse it to identify potential cost-saving opportunities, compare different vehicles or strategies, and make more informed decisions to optimise fleet operations.
The accuracy of your TCO calculation relies heavily on the quality and reliability of the data you use. It might be a little bit of work, but having a clear understanding of your fleet TCO can have significant benefits for your business in the long run.
