AFLA Whitepaper: 5 Tips for Managing Your Fuel Costs • Page 1

automotive fleet & leasing association white paper series • Volume 26

for5 tips Managing Your Fuel Costs

by Pricelock

AFLA Whitepaper: 5 Tips for Managing Your Fuel Costs • Page 2

Five tips for Managing Your Fuel CostsFuel prices are a fundamental problem for businesses of all sizes. In the last three years, gasoline prices jumped between $1.61 and $4.11.1 With fuel price protection, you can maintain lower fuel costs, protect your earnings and gain a competitive edge during unexpected inflationary cycles. Creating and implementing an effective fuel price protection plan is now easier than ever before. New services allow small and large companies to implement fuel price protection online with tools and helpful experts just a click or phone call away.

The success of your protection plan is heavily dependent on choosing the right plan terms and program partner so we’ve outlined five tips to help you implement the best fuel price protection plan for your business.

Begin by analyzing your historical fuel consumption to understand your exposure to fuel price volatility. Look at the last 12 months, determine how much fuel your busi-ness consumed each month—number of gallons, average price spent and overall fuel cost.

If you are using a fuel card program, your reporting should break out this information. And if you don’t have detailed reporting, it’s okay. You can still estimate your fuel spend by doing some easy calculations.

After you’ve estimated your fuel spend for the year, you can see how your fuel costs varied month to month. For the months when fuel costs were higher, were you unable to make budget? Were you forced to drive less which impacted the level of service you provided?

Now calculate the impact of various fuel price increas-es—for example, how much more would you have to spend if prices increased 25¢? At what point would price increases be detrimental to your business?

HELPFUL INFORMATION

Average miles driven per year is 12,000 miles for passen-ger cars and over 15,000 miles for light trucks.2

Average miles per gallon data can be found by vehicle make and model year at www.fueleconomy.gov.

Average historical gasoline and diesel prices are broken out by week, month and year and by region at the U.S. Energy Information Administration website at www.eia.doe.gov.3

tip 1: Do Your Homework

1. Source: U.S. Dept. of Energy national average gasoline price.2. U.S. Environmental Protection Agency, “Emission Facts: Greenhouse Gas Emissions from a Typical Passenger Vehicle,” 2005.3. Go to www.eia.doe.gov, select the Petroleum link in the Energy Sources column and then select the Weekly Retail Gasoline and Diesel Prices link in the Prices section to find average retail gasoline and diesel prices in your area by week, month and year.

AFLA Whitepaper: 5 Tips for Managing Your Fuel Costs • Page 3

tip 2: Set Your Main Business Objective Once you have a better understanding of your business’s fuel price sensitivity, this will help you determine your main business objective. Namely, do you want to use fuel price protection for budget predictability to benefit from lower, predictable fuel costs or for business protection against unforeseen large increases in fuel prices?If your main business objective is budget predictability, you can control your overall fuel costs by choosing a protection price below market price. If you decide you can sustain small fuel price increases but want protection when it matters most, set your protection price at the highest fuel price your business could withstand without harming your ability to do business.

Keep in mind that the lower your protection price, the more likely you will get a payout but you will have to pay more for the plan upfront. While a lower protection price may seem more desirable, it comes with a higher upfront cost so you’ll need to decide the right cost benefit for your business. A more affordable plan can still safeguard your business and provide protection when you need it most.

“Hedging can be a cost-effective way to minimize downside risk. In good times it may seem like an unnecessary expense, but it’s a small price to pay for being protected in tough times.”-The Boston Consulting Group4

4. “A Key to Smart Outsourcing: Hedging Against Risk,” The Boston Consulting Group, 2007.

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Some businesses use more fuel during differ-ent parts of the year. Suppose you own a snow removal business and consume most of your fuel in winter months. You may want a plan that cov-ers December through March. Or perhaps you are busy throughout the year in which case you might consider a year-long protection plan.

Note that fuel prices tend to be seasonal with prices highest in the summer. If your business consumes a large volume of fuel in the summer months, you may want to have extra protection June through August.

Remember that the longer the term of your protec-tion, the costlier your protection plan. If you want to keep your costs down, consider implementing a short-term plan for your busiest months or multiple plans where the first plan is year-long with added gallons for your busiest months.

SEASONAL PLANS:

tip 3: Understand any Seasonal Trends in Your Business

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JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC

ESTIMATED FUEL USAGE

Plan 2 (busiest months)

Plan 1 (year long)

tip 4: Keep It Simple and Easy to Understand

When evaluating different fuel price protection programs, keep it simple and look for a program that is easy to understand. The following checklist of questions is designed to help you determine the best protection program for your business.

How do you get paid when fuel prices rise above your protection price?

Are you required to submit receipts to get •payouts? Will your program transfer the payout into your •bank account without any paperwork on your part?

What happens when fuel prices fall below your protection price?

Do you have to pay a penalty? •Do you still benefit from lower fuel prices at the •pump?

Does the program require changes to how you purchase fuel?

Do you have to pre-purchase fuel? •Are there minimums you need to meet?•Does the program enable you to use less fuel or •find cheaper prices at any time?

Once you purchase a plan, are there any additional costs?

Does the program provide flexibility for a custom plan?

Do they offer consultative services?•If you are a larger and/or public company, can •the program meet your accounting and financial reporting requirements?

tip 5: Monitor Your Protection Plan Performance Once your plan is implemented, make sure the program provides access to ongoing performance reports. This way you can monitor your plan and ensure it meets your business objectives.

Fuel price protection should become part of your regular budget process and we recommend that you analyze your program at least once a year. Make adjustments as needed to future protection plans with key learnings from previous plans. As more and more companies adopt fuel price protection, it is quickly becoming a strategic best practice. Be sure you make fuel price protection a permanentpart of your business strategy.