By John R. Hill
President, First Bankers
It’s always exciting to buy a new fire truck. But that excitement can vanish when the fire truck of your dreams crashes against the harsh realities of your budget.
For some departments, that means scrapping all the hard work in developing the truck you configured and going back to the beginning and removing options your department sorely needs.
There are a couple of ways to match up the fire truck you need with the budget you have and this article will look at both ways to tackle this problem.
Weekly, I talk with a fire department that has spent hundreds of man hours developing the truck they want only to learn they can’t afford the truck.
Most fire departments have two teams working on a fire truck purchase — the truck team and the budget or finance team. Departments who purchase their truck this way spend less time getting the truck that fits their operational and budget needs.
Is your department in one of the following situations?
- You are already saving, reserving, or setting aside a certain amount each year for the fire truck purchase (but haven’t saved enough to pay the truck outright)
- You are paying off a lease or loan for a previous fire truck within the next year.
- You are receiving a new source of revenue that can be dedicated to the truck purchase (new tax revenue, increase in Town/Municipal contract, verifiable and committed donation source)
If so, your payment budget is fairly simple to calculate. It’s the amount you are saving or paying or receiving.
If your department is not already saving, or paying off a past loan, or getting a new committed revenue source, then your department must calculate a payment budget from your department’s cash flow.
Cash flow is the amount of revenue you have left over each year after paying all your operating expenses.
Steps to follow
First, determine normal revenue. Determining your normal revenue is simply adding up all the recurring income your department receives each year. It does not include such one-time income such as grants, unusual donations, insurance damage claims, or any other type of income that you don’t regularly receive each year.
Second, determine normal operating expenses. Simply, this is the amount you must pay each year to operate your department — to pay the utilities, purchase fuel, perform minor repairs and maintenance, or pay any payroll or wages (if combination or career department).
Normal operating expenses do not include unusual, one-time expenses such as items purchased from grants, major unusual repairs or equipment purchases, etc.
Operating expenses also do not include any loan or lease payments. They are called capital expenses are viewed differently than operating expenses.
Next, determine your department’s cash flow. Your department’s cash flow is easy to calculate. Simply subtract the normal operating expenses from normal revenue.
The amount is your department’s cash flow and is the amount of money you have each year to pay payments.
Note: It make a lot of sense to calculate your cash flow for more than just one year. Three years should provide an average cash flow.
Finally, determine your payment budget. A fire department will generally use 80 percent of its cash flow for all its loan payments. The reason for 80 percent is to provide a small cushion for unexpected events. You don’t want to commit every penny of income and then get caught with an unplanned repair or purchase.
If your department has no other loans, this 80 percent of cash flow is your payment budget.
If your department has other loans, subtract the other payment(s) total from the 80 percent of the cash flow to determine how much remaining cash flow you have for a new truck payment.
Let’s have a quick example of how this calculation works:
- Normal income $200,000
- (minus) Normal operating expenses $120,000
- Cash Flow $ 80,000
- Eighty percent payment budget $64,000
If your department had a $30,000 truck payment, your new truck payment budget would be $34,000 ($64,000 payment budget minus existing loan payment of $30,000).
This method is a financially conservative approach to determine your payment budget.
For many departments, they are more conservative in their analysis and want more financial cushion to protect them.
Or, they know that revenues may be declining or expenses may be increasing or both.
In that case, use your more conservative payment budget for your new truck purchase. Ultimately, your comfort level is more important than squeezing out the maximum truck budget.
By developing and using a payment budget, you’ll spend much less time configuring and have the comfort of knowing you can afford the fire truck.
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You can convert your budget amount into an affordable truck price by using a free tool – The Truck Budget Calculator. You can find this free tool at www.firstbankers.net/How-Much-Fire-Truck-Can-I-Afford.html