Now that gas prices have fallen from this summer's historic highs, it is worth considering how to plan for future fuel price volatility and its effects on your business. Adopting a FAVR vehicle program allows you to stay responsive to rapid rises and falls in fuel prices.
Fuel price volatility: a good reason to adopt a FAVR vehicle program
When gas prices began to spike in March, both individual drivers and businesses were caught off guard and scrambled to figure out how to respond. For mobile workers whose jobs demand vehicle travel, the financial costs were particularly difficult to sustain.
By June, when the prices averaged around $5/gallon nationwide, employers were finding ways to adjust. The IRS raised its business mileage rate from 58.5 cents-per-gallon to 62.5 cents-per-gallon, effective July 1, in recognition of the massive increase in prices.
But now that prices have eased off, what should employers who boosted their car allowances or mileage rates do? What if average prices continue to trend downward? Do you reduce your allowance or mileage rate again? How do you know prices will not increase again?
These decisions are not easy to make. It is not easy to predict the future behavior of oil markets or the actual prices at the pump. Plus, you're dealing with valued people who represent your organization and who deserve to know that they will be fully provided what they need to do their job.
A fixed and variable rate vehicle program, or FAVR, takes the uncertainty out of these difficult questions. Instead, responsiveness to volatility is intrinsic to the program design.
How FAVR reduces risk from volatile fuel prices
A fixed and variable rate plan has two advantages that allow it to protect both the organization and its employees from fuel price volatility.
1. Separating out variable costs (like fuel) from fixed costs
A FAVR reimbursement program first calculates the expected fixed costs of a vehicle owner. These are predictable, relatively stable costs like insurance, taxes, and depreciation. These costs are reimbursed through a fixed monthly payment.
Driving costs that may vary from month to month, including fuel, oil, and maintenance, are reimbursed separately using a mileage rate. This rate can be changed on a monthly basis in response to increases or decreases in fuel prices.
2. Factoring localized cost data into the vehicle rates
The other advantage of FAVR is its use of localized cost data for each driver in the program. A driver in California will receive a higher mileage rate than a driver in Texas due to the significantly higher gas prices.
Because fixed costs can also vary by location, those reimbursements are also calculated using the zip code of the vehicle's garage location. Altogether, the combination of a variable rate with use of localized data makes FAVR an ideal approach to calculating accurate vehicle reimbursements – even when fuel prices rise or fall suddenly.
Reimbursement certainty despite cost volatility
By adopting a FAVR reimbursement model, you take the guesswork out of calculating a fair car allowance or mileage rate. This is more important than ever in a time of uncertainty about gas prices, high inflation of vehicle prices (both used and new), and increased mobility of employees.
FAVR allows both the employer and the employee to enjoy both the predictability and sense of fairness that comes with a rate that is transparent in its calculations and flexible in its ability to change as costs change.
This is a tax-free reimbursement approach, so no money is wasted as part of the equation. To learn more about this approach and how it might work for your organization, contact mBurse or read our Ultimate Guide to FAVR.