Step 2: Profit or Loss?
There are typically two key reasons for implementing a cash alternative to company cars;
- cost savings compared to providing company cars;
- improved offerings for recruiting/retaining staff.
However, no matter which point is the prime motive for your business offering a cash allowance, probably the most important impact is likely to be from the cost.
In other words, will a cash allowance save your business money on operating your fleet or will it cost more and, if so, could any cost increase be offset by sufficient enhancements to employeer recruitment, retention and motivation to make it worthwhile?
It's beyond the scope of this article to answer the last point - it's so subjective that HR practitioners, consultants and employees will all happily engage in hours of debate on the pros and cons, so we're going to concentrate on the quantifiable impact of a switch to cash.
How To Quantify Costs
Assuming you've already followed Step 1 and calculated the cash allowance then you'll need to:
- Calculate the employer's national insurance cost of the cash allowance.
- Decide whether or not the allowance will qualify for benefits such as pensions, etc, and the associated cost.
- Identify the net business cost impact of a swap to cash after changes to business tax relief and recoverable VAT on cash compared to company car running costs.
You'll need to do this for every level in your existing company car plan where you aim to provide cash allowances.
Multiply the individual cash allowance cost per company car at each grade by the number of employees eligible for a car at each level.
The resulting number is your maximum cost impact of a change to cash and your highest cost-risk point, i.e. if everyone eligible for a company car decides to take a cash allowance instead.
Also factor into the calculations the cash-flow impact of switching from company cars to cash allowances, particularly if you buy your company cars outright.
This is because swapping to an allowance can provide provide a significant cash-flow improvement compared to buying outright, with an effect similar to switching to leasing (but without the corresponding impact on your company balance sheet).
Once again our cash or car calculator will take you through this.