For a small business, investing in a vehicle will be one of the bigger decisions that need to be taken. Whether you are considering a car to get you to meetings with clients or a truck to shift tons of equipment, it is a major capital outlay and one that you will live with for years. It pays to get the decision right in the first place.
The Basic Math
In theory, your decision is governed by a simple sum. Work out how much the vehicle is going to cost over the time you expect to own it. Compare that to the income which you expect it to generate. Assuming the income is greater than the expenditure, is it enough to justify the increased work and risk involved?
There are two aspects to the cost of owning a vehicle: the running costs and the depreciation. Both will vary greatly between similar looking vehicles and you need to have as clear a picture as possible.
The running costs include fuel, maintenance, repairs, and insurance. You can also add the interest you may pay on a loan. All these can be set against tax for that proportion of the mileage which is for business use.
The depreciation is the cost of the vehicle, less the value it is expected to have when you dispose of it. Some higher end vehicles, like a RAM 3500, might expect to have a better resale value or a longer life than a cheaper vehicle, and that needs to be taken into account.
The tax that you can claim back on the depreciation, known as Capital Cost Allowance, is more complicated, and you need to calculate it carefully—better still, get an accountant to do it for you.
Consider the Alternative
The alternative to purchasing a new vehicle is to lease one. This can make the estimate of the cost much easier, as most of it is included in your monthly payment to the leasing company.
The disadvantages of leasing include the facts that at the end of the lease you have no vehicle to sell (or to carry on using) and that some leases can be rather inflexible to the changing needs of your business.
To estimate the contribution of the vehicle will be part of your overall business plan. It depends on many factors, and you need to be realistic in your projections about how your business will develop. For instance, you will decide whether you need to maximize your profits in the short term or are free to plan for steady profits over the longer term.
Buying a vehicle, especially a major item of plant such as a working truck, is a difficult decision and will always involve some theoretical projections. Do the work carefully and with a hard sense of realism, and you should be able to make a clear decision that you can live with confidently.
Taylor Bryant has his own business which has a fleet of vehicles. He discusses company vehicle topics in his articles which appear around the web.