How do companies choose their cost structure? What is the nature and function of operating scales? What are the sources of functional and dysfunctional scales of operation? These policy questions relate to the optimal overhead of a business enterprise: the right mix of expenses that maximizes return on investment and shareholder wealth while simultaneously minimizing the cost of operations.

Clearly, effective economies of scale (MES-Minimum Efficiency Scale) correlate with an optimal cost structure and are critical to sound business strategies designed to maximize the wealth-producing capacity of the firm. In this series on effective expense management, we will focus on the relevant strategic overarching issues and provide some operational guidance. The primary purpose of this review is to highlight some basic cost theory, strategic expense ratios, and industry best practices. For specific financial management strategies, consult a competent professional.

As we have already established, the optimal cost structure and the appropriate scale of operation for each company differ markedly depending on the general dynamics of the industry, the structure of the market: the degree of competition, the height of entry/exit barriers , the market competition, the life cycle stage of the industry and its competitive position in the market. In fact, as with most market performance indicators, the position of a company’s specific cost structure is revealing only in reference to industry expected value (average) and industry benchmarks generally. accepted and best practices.

One of the most important contributions of economic science to management science is the optimization principle, derived from the Bellmann equation, the dynamic programming method that divides the decision problem into smaller subproblems and the first applications in Beckmann economics , Muth, Phelps, and Merton. and the resulting recursive model. In practice, any optimization problem has some objectives that are often called objective functions, such as maximize production, maximize profit, maximize profit, minimize total cost, minimize cycle time, minimize distribution cost, minimize the cost of transportation, etc.

Types of cost structure:

Cost structures consist of a combination of fixed costs, variable costs, and mixed costs. Fixed costs include costs that remain the same regardless of the volume of goods or services produced within the current scale of production. Examples may include salaries, rents, and physical manufacturing facilities. A number of capital-intensive companies, such as airlines and manufacturing companies, are characterized by a high proportion of fixed costs that can be effective barriers to entry for new entrants into the industry. Note that effective exit barriers are effective entry barriers. When companies cannot easily exit unprofitable markets due to high exit barriers, they should not enter such markets in the first place.

Variable costs vary proportionally with the volume of goods or services produced. Labor-intensive businesses focused on services such as banking and insurance are characterized by a high proportion of variable costs. In practice, variable costs often take into account profit projections and the calculation of break-even points for a business or project.

Mixed cost items have fixed and variable components. For example, some management salaries do not normally vary with the number of units produced. However, if output drops dramatically or goes to zero, then wear and tear can result. This is evidence that all costs are variable in the long run.

Finally, a company with a large amount of variable costs (compared to fixed costs) may exhibit more consistent unit costs and thus more predictable unit profit margins than a company with fewer variable costs. However, a business with fewer variable costs (and thus a higher amount of fixed costs) may magnify potential profits (and losses) because revenue increases (or decreases) are applied at a more constant cost level. .

Most commercial companies define the cost structure in terms of the costs incurred in relation to a cost object or activity. And because some expenses can be difficult to define, we often implement an activity-based project to allocate expenses more closely to the cost structure of the activity or cost object in question and use activity-based accounting. Note that the time required to complete any given activity is the critical factor in cost management. Therefore, to minimize the overhead of any activity or project, it is critical to minimize the time required to complete the activity or project. The following are examples of key elements of cost structures for various expense objects:

Product cost structure: Under this structure there are fixed costs that can include direct labor and general manufacturing expenses; and Variable expenses which may include direct materials, production supplies, commissions, and piece rate wages. Service cost structure: Under this cost structure there are fixed expenses that may include general administrative expenses; and Variable costs that may include staff salaries, bonuses, payroll taxes, travel, and entertainment.

Product Line Cost Structure: Under this structure there are fixed costs that can include administration overhead, manufacturing overhead, direct labor; and Variable costs which may include direct materials, commissions, production supplies; Y Customer cost structure: Under this structure: Under this cost structure there are fixed costs there are general administrative expenses for customer service, warranty claims; and Variable costs that may include costs of products and services sold to the customer, product returns, credits taken, discounts for early payment.

The optimal cost structure is the combination of fixed and variable costs that minimizes total operating overhead while simultaneously maximizing net operating income. The cost structure describes all the costs (fixed and variable) incurred to operate a business model. Further away, cost structure refers to the types and relative proportions of fixed and variable costs incurred by a business enterprise. In practice, the concept of cost can be classified by region, product line, product item, customer group, department or division, etc.

In the cost-based pricing strategy, the cost structure is used as a technique to determine effective prices as well as to identify areas where expenses could potentially be reduced or at least put under better management control. Therefore, the cost structure concept is a useful managerial accounting tool that has many financial accounting applications.

All business models have costs associated with value creation, which occurs by adding real or perceived value to a customer for a superior good or service; value delivery: creating and maintaining effective, mutually beneficial and satisfying customer relationships; and value capture, which occurs through changes in the distribution of value in the good or service and the production chain. The objective function is to minimize total operating expenses. Such overhead costs can be calculated relatively easily after isolating cost drivers, key activities, key inputs; key resources and strategic alliances.

In our experience, operating costs can be minimized in all business models. Furthermore, low-cost structures are more important for some business models than for others. Therefore, it is useful to distinguish between two broad categories of business models: cost-based and value-based (many business models fall between these two extreme categories).

DuPont’s model demonstrates that the return on investment is calculated as the product of the profit margin (net income/sales) and the turnover rate (sales/total assets). DuPont’s analysis indicates that ROE is affected by three factors: operating efficiency, which is measured by profit margin; Efficiency in the Use of Assets, which is measured by Total Asset Turnover; and Financial Leverage, which is measured by the Equity Multiplier: ROE = Profit margin (profit/sales) * Total asset turnover (Sales/Assets) * Equity multiplier (assets/equity).

Types of business models:

cost-based business model-Most cost-based business models focus on minimizing overhead wherever possible. This approach aims at standardization and least cost method by creating and maintaining the most efficient cost structure possible, using dynamic low price value propositions, maximum automation and strategic outsourcing.

Value-driven business model– Under this business model, most companies are often less concerned with the cost implications of a particular business model design and instead their primary focus is on value creation. Premium value propositions, customization, and a high degree of personalized service often characterize value-based business models.

Some operational guidelines:

In practice, companies seeking to optimize cost management must optimize time management. One of the most significant revelations of activity-based accounting is the impact of time and activity on the overall operating cost of companies: cost structure is activity-driven, and activity is time-driven. Therefore, time is the most critical factor for effective cost management. Simply put, companies must reduce the time required to execute a specific activity in order to reduce the cost associated with the specific activity, ceteris paribus.

Furthermore, companies looking to take advantage of and optimize economies of scale must optimize the cost savings derived from the specific scale of operation. Note that operating scales can be functional and derived from the experience curve that reduce logarithmic costs; learning effects; range savings; Division of work; specialization; both horizontal and vertical differentiation or the long-term cost-increasing and dysfunctional by-product of entrenched, reactive management with a moldy, personality-driven vision; organizational inertia; adaptive and abusive supervision; increased bureaucratic cost; lack of innovation; increased internal and external transaction costs.

In short, companies optimize cost structure through effective time management and optimization of operation scales. Therefore, firms seeking to maximize the firm’s profit-producing capacity must formulate and execute efficient and effective cost-management strategies based on an appropriate mix of costs that maximizes return on investment and wealth of stakeholders. shareholders while minimizing the cost of operations, simultaneously. As we have already established, there is growing empirical evidence to suggest that firms that choose scale and volume tend to outperform those that choose premium, ceteris paribus.

Kwame Mainu and his team from the University of Warwick in England were helping to run a short course for Ghanaian small business owners at the University of Kumasi. However, because a drug cartel had tried to persuade visiting Warwick academics from Kumasi to act as couriers, a British undercover agent, a Ghanaian veteran, Tam Gordon, had been included in Warwick’s team. A company with a representative registered to attend the course, Sika Ye Na, was suspected of being connected to the Lebanese firm Hanabis, which was known to be involved with drug traffickers. Kwame knew that if Sika Ye Na Enterprise was connected to Hanabis, it was likely that the owner, Cecilia, was the ex-girlfriend of one of the Lebanese directors. In this case, Cecilia could have been a contemporary of his ex-wife, Comfort, or well known to Comfort through her numerous contacts in the Kumasi business community. “There’s a good chance Comfort knows if Cecilia is connected to Hanabis,” Kwame told Tam, “let’s pay her a visit when we close this afternoon.”

“Any excuse to see your ex-wife,” Tam said with a wink.
“It’s a serious suggestion that will help our investigation,” Kwame insisted with a smile.
“Combine business with pleasure,” Tam continued along the same lines.
If you don’t stop, I’ll have your fufu rationed.
‘Oh, that’ll stop me!’

Comfort welcomed them with, ‘I’m glad you came, the cook has made too much fufu and was going to throw away most of it.’ Kwame and Tam exchanged smiles. “Kwame threatened to ration my fufu today,” Tam told her. ‘Oh, don’t do that, Kwame, we need your full capacity tonight.’

A fierce tropical storm, which often struck at this time of day, prevented them from conversing over drinks in the garden, and the drumming of rain on the roof, walls, and windows prevented conversation inside. ‘Is this storm a phenomenon, or is the rainy season earlier this year?’ Tam yelled in Kwame’s ear. “Whatever it is, we’d better wait quietly until it’s over,” Kwame yelled, – it won’t last long.

They sat in silence sipping their drinks, each lost in their own thoughts. Kwame sensed that he and Comfort shared thoughts in common, but what was Tam thinking? Was he narrowly focused on his current research, anxious only for an early reduction in ambient noise pollution, or was he thinking of past memories of tropical storms long ago heralding cool, passionate nights after long hot days? He looked at Tam, who returned his gaze with an intensity that convinced Kwame that telepathy might not be a myth. He decided to restrict his museum to his own affairs.

After about twenty minutes, normal conversation could be resumed. What can I do for you guys? Comfort asked. ‘First of all, can you please give me another glass of this delicious Grunshie dick,’ said Tam. “It brings back so many good memories,” she added with a pointed look at Kwame.

Vacation pay is three weeks for employees who have worked for the same employer for five years.

In Ontario, there are certain employment guidelines regarding vacation leave that entitle employees to paid time off. Although there are some categories of work that are exempt, most employers must comply with the Employment Standards Act (ESA) when it comes to granting paid time off.

It is important to note that time off and vacation pay are different from vacation pay and entitlement.

As of January 1, 2018, vacation time and pay places employees into two groups based on the number of years an employee has worked with the same employer. Here are the key differences in minimum vacation time and pay:

1. Employees who have worked less than five years. earn two weeks of vacation time after each 12-month vacation entitlement year, calculated by four percent of your gross wages (excluding any vacation pay) earned in the 12-month vacation entitlement year or period of proof (if applicable).
2. Employees who have worked five years or more Earn three weeks of vacation time, calculated at six percent of your gross wages earned in the 12-month entitlement year or voucher period (if applicable).

As an employer, you can provide more rights and benefits to your employees beyond the minimum standards set by the ESA. However, it cannot be less than the amounts listed above.

10 Vacation Pay Facts for Ontario Business Owners

Here are ten things to keep in mind, in addition to the minimum vacation standards:

1. A year of vacation entitlement is a recurring 12-month period that may be counted from the employee’s hire date or, alternatively, throughout the calendar year. If the latter, you must allocate a prorated amount of vacation time for the duration between your employee’s start dates and his or her calendar year; this is called a “chunk period”.
2. You are not required to provide vacation time if an employee does not complete a full year to which they are entitled to vacation or a reserve period. However, employees earn vacation pay as they earn their salaries.
3. Vacation time is accumulated during a leave of absence, such as Parental or Maternity leave, since there is no interruption in the employment relationship.
4. Your employees must take vacation within ten months of the end of a year’s vacation entitlement or safekeeping period.
5. As an employer, you also have the right to schedule vacations and ensure that your employees take time off before the end of that ten-month period.
6. Employers must schedule their vacation time in blocks: two- or three-week blocks, or two- or three-week blocks, depending on years of service. For shorter periods (ie one day), your employee can request it, and the agreement can be made in writing or electronically.
7. In most cases, earned vacation pay must be paid in a lump sum before your employee takes vacation. However, there are several exceptions to this.
8. Your employee cannot use all or part of their vacation time; however, as the employer, he is still required to provide them with earned vacation pay. In this case, he will need an electronic or written consent along with the approval of the Director of Labor Standards.
9. In cases of termination of employment, you must provide your employee with vacation pay earned. This is required within seven days of termination or on the next payday.
10. If your employee requests a record of their vacation pay (in writing), you must provide the statement within one week of the request or the next payday.

If you’re still wondering how to calculate vacation pay, or have questions like what to do about vacation for seasonal employees, it’s always a good idea to get help from an HR expert.

Corporate Social Responsibility (CSR)

Public relations as a marketing tool

As human consciousness began to acclimatize to the global village paradigm, the importance of public opinion for Corporate Social Responsibility became increasingly clear to corporate entities, in the same way that sponsorships affect a sports figure. . While the basic ideology of a corporation forms the foundation of the corporation and is reflected in its respective purpose and mission statement, stakeholder opinion affects the corporation in substantial ways, existing as a kind of feedback loop in the process of your effort.

The sound of one hand clapping

For a good example of the power that exists in the collective consciousness, consider two different scenarios. The first is sitting at home, alone, watching a funny movie. Now consider the same thing, only this time there are other people present in the room. Suddenly, the effect is totally different: the scenes are funnier, the script more charming, the experience is significantly increased simply by being a shared experience.

Philanthropy existed before the Internet, to be sure, but even the term “keyword” testifies to the common language of the Internet, now shared globally. Growing concerns about social problems were given a powerful new place; Along with this opportunity for expression, for consumers, came an opportunity for corporations in terms of possibilities for powerful public relations campaigns of an indirect nature.

Paradigm shift

As awareness became more collective (largely through the vehicle of the Internet), concerns began to be expressed and shared across individuals, corporations, and countries, resulting in many corporations being green audited. Through shared communications, a paradigm shift occurred – and is still occurring – in the social governance of these businesses and consumers.

When bigger is not always better

Concerns have continued to grow about the ecological footprint imposed by corporations, as seen in carbon emission regulations, curtailment of oil-drilling operations, and other measures aimed at accelerating consumption in the name of conservation.

collective prospective

CSR is essentially a collective attempt to anticipate the risk that demand will outstrip supply. The land and its generosity are ours; therefore, we should aspire to be good stewards.

With future vision

Sustainable development is the ability of a corporation to weigh opportunities for immediate financial gain against the need to control consumption of what we know to be finite available earth resources. At the advent of the Industrial Revolution, the superpowers zeroed in on a hypothetical finish line, gobbling up resources in a rush to assert dominance. What was not often considered was the possibility that there is a real, real finish line with respect to the available resources themselves. That is, one day they would run out.

How is the value of an option calculated?

First you have to understand the meaning of intrinsic and extrinsic. The premium option is made up of these two values. Intrinsic is the value of the option if you exercised it on the futures contract and then offset it. For example, if you have a $5 November soybean call option and the futures price for that contract is $5.20, then there is an intrinsic value of .20 for that option. Soybeans are a 5,000 bushel contract, so 20 cents multiplied by 5,000 = $1,000 intrinsic value for that option.

Now let’s say the same $5 soy call from November costs $1600 in premium. $1,000 of the cost is intrinsic value and the other $600 is extrinsic. The extrinsic value is made up of the time value, the volatility premium, and the demand for that specific option. If the option has 60 days left to expiration, it has more time value than if it had 45 days left. If the market has large price movements from low to high, the volatility premium will be higher than a market with a small price movement. If too many people are buying that exact strike price, that demand can also artificially increase the premium.

How much will an option premium move relative to the underlying futures contract?

You can find this out by finding out the delta factor of your option. The delta factor tells you how much the premium on your option will change based on the movement of the underlying futures contract. Let’s say you think December gold will go up $50/ounce or $5000/contract at expiration. You bought an option with a delta factor of .20 or 20%. This option should earn approximately $1,000 in premium value from the expected future gold price movement of $5,000.

Can an option speculator make a profit before the option has intrinsic value?

Yes, as long as the option premium increases enough to cover transaction costs, such as commissions and fees. For example, you have a December corn purchase of $3 and December corn is $270/bushel and your transaction costs were $50. Let’s say your option is delta 20% and the December corn futures market is up 10 cents/bushel to $2.80/bushel. Corn is a contact of 5,000 bushels, so 1 cent multiplied by 5,000 = $50. Your option premium will increase by approximately 2 cents = $100. Your break-even point was $50, so you have a $50 profit with no intrinsic value because you’re still out of the money by 20 cents.

Investing in futures and options is very risky and only risk capital should be used. Past performance is not indicative of future results. Cash, options, and futures do not necessarily respond similarly to similar stimuli. There are no guaranteed good trades.

The decision to file for bankruptcy requires you to look for alternative ways to achieve your goal of becoming financially debt free. There are several approaches, and each achieves the result you’re looking for, with different effects on credit scores.

debt payment seems like a no-brainer and is what we should all strive for given the means to do so. However, paying down debt on general unsecured credit card debt is the lowest budget priority and when there is no money left, it should not be paid. Sticking to a strict budget takes discipline, but the effort will pay off when you eliminate debt without filing for bankruptcy. I recommend Dave Ramsey’s program based on his book Total Money Makeover for eliminating debt through payment.

debt payment is where you negotiate with creditors to pay less than you owe on the debt. Typically, the debt is already past due and has a negative impact on credit scores. Debt negotiations can save you 50% of what you owe. There is a stumbling block to paying off debts for less than what is owed. One catch is that you may end up owing income taxes on the canceled debt. Another pitfall is that your credit score may take longer to improve when debts are settled when the creditor updates the information with your settlement payment.

A #protip here is to make sure you are legally obligated to pay off any debt before doing so. In all states, there are laws that limit the time in which a creditor can take legal action, which is called a statute of limitations. In California the statute of limitations on a written contract (a debt you signed for like a credit card application) is four (4) years. After that, he is no longer legally obligated to pay the debt, unless the creditor has sued him and obtained a judgment in a court of law. Getting help from a Credit Counseling Agency is helpful for those who are not comfortable negotiating with their creditors.

Sometimes doing nothing can be the right approach. If you have a social security disability or don’t have anything of value, creditors may not be able to collect anything from you. If you are “judgment-proof,” you may not need to pay your debts or file for bankruptcy. However, this strategy does not work for family support obligations or taxes.

Not-so-helpful alternatives to bankruptcy include mortgage refinancing to pay off debts or debt consolidation. Essentially, taking out a new loan to pay off old debt does not eliminate debt. However, these can be wise moves if you lower the interest rate or give you an income tax deduction like a mortgage on a home. Otherwise, more debt is not the answer.

Sooner or later, as everyone finds out, nothing in this world is free. Although there are literally hundreds of free hosts appearing on the Internet, no one can stay in business long by giving them away. So how can hosting services offer free hosting?

Easy.

One way is to make some of your money by registering your domain name. Domain registration is a necessary step for any future website owner (some low cost hosts play a numbers game between your monthly cost and your annual domain registration fee, for example:
$5/mo and $30 sign up fee, or $7/mo and just $6 to sign up, or… you get the idea).

Another way to earn money is to add advertising to your web page. They will get paid each time the banner is displayed or each time someone clicks on the ad.
Some will offer additional add-ons like spam or virus protection, domain theft protection, or other services at an additional cost. Of course, if you think you need these services, you have to buy them.

There are also limitations such as storage space, bandwidth, number of email accounts and
so on, hoping you’ll need more later and decide to upgrade.

So, are so-called Free Hosting Services worth considering?

They sure are! There are situations where someone may not need tons of storage, bandwidth, email, etc. just find a
host that offers what you need without too many compromises. One such server that I use quite frequently is doteasy.com. No banners, just an annual domain registration. And for me, they always have
responded to my questions within 24 hours via email.

So if you’re new to web page development, just want your own personal web page, etc., and don’t really have that intensive system requirements, then free hosting is the way to go.

Blogs have been around for quite some time. It is quickly becoming the other alternative to receive news. It has evolved from being a place to rant and rave about a topic or share personal comings and goings to a tool used by businesses to share information with employees or customers to replace newsletters.

If you’re considering a blog for internal company communications, think about what you want the blog to represent and the type of information you want to share. Plan your blog before you start researching the tools to use it or assign someone to maintain it. Otherwise, you can select the wrong tool and cause the maintenance person to spend too much time on a “part-time” task. Also, if your blog is going to replace a current print or email company newsletter, you’d better do a survey to make sure employees are willing to check the web instead of having paper they can read on breaks. or send it directly to your desktop via Email. If no one is willing to go to the blog to get the information, it is a waste of time and money to create a blog.

If you are considering a blog for external communication, usually for existing or potential clients, but could also include vendors, then you need to consider the information that will be shared as well as its presentation. Does the blog need to have a consistent look and feel with your other branding and marketing tools? Should it be part of your website or separate from it? Is it primarily a marketing tool, training program, information sharing, or some combination? Who will provide the articles/posts for the blog and how often? If you plan to use the blog to replace a newsletter, how will current readers know when the blog is updated? Will you send them an email to notify them of the updates, or will you just let them know the planned posting frequency so they can check for themselves? Will you use Twitter or another social network to communicate your blog as part of your marketing campaign?

If you’re a small business or independent consultant considering a blog, do you really need one? Perhaps it would be better to partner with another consultant or company to share responsibility for a blog that would benefit both of you. If you want to write primarily to share information, but don’t want to create your own blog, consider guest posting on an independent blog that already exists and provides posts with the kind of information you want to share. You can check the candidate’s blog to see if they have more than one person writing. If they do, find a contact and send an email suggesting your topic and asking if they’d like a guest article or post by you. This saves you time on creating a blog and finding an audience. This will increase your confidence in your ability to provide data for the blog in case you later decide you need your own blog, and then you’ll be ready for the hard part of writing a blog.

Before creating a blog, ask the questions above for the type of blog you’re considering. Then decide if your business really needs a blog.

Not everyone has the luxury of being around salsa. If you’ve made a sauce recipe, it can be tricky to bring it to someone far away. Fortunately, there are several agencies that can be used to send your sauce to your jealous friends. Knowing how they are different will allow you to make the best decision when choosing your condiment messenger.

The United States Post Office has been around for quite some time, and in addition to timely letter service, it also ships packages. There is a list of liquids and other substances that cannot be shipped due to federal regulations, and none of the ingredients found in a sauce recipe are on it. To ensure the safety of its employees and customers, the USPS does not allow hazardous chemicals to be mailed. As long as your sauce does not have poisonous or explosive properties, it will be safe for shipping. The most convenient feature of the post office is free pickup. However, if your package is significantly heavy, you should call ahead so your carrier can be informed. Please note that if your package weighs 13 ounces or more, it must have electronic postage. An example of electronic postage is Parcel Post and can be printed from the Internet through the post office’s website. Packages with only stamps must be brought to a post office window to be cleared for shipment.

Federal Express, or Fedex, is another well-known delivery service that specializes in package delivery. Like the post office, Fedex has a multi-tiered product line. Fedex has better rates for packages that don’t need to be shipped quickly, but doesn’t have as many fast delivery options as the post office. The full list of shipping options with prices can be found simply on each carrier’s website. Carriers also have this information on hand when they are in the field.

Just because you ship your package via Fedex, doesn’t mean it will be delivered by them. The post office and Fedex have a partnership and some packages are sorted by Fedex and shipped by the post office. Most of the planes used during the shipping process are owned by Fedex and the Post Office purchases space on these vehicles. Similar to how you own your mailbox and the inside of your mailbox is considered the property of the post office.

Some of the ingredients contained in a sauce recipe have a shelf life and can go bad after a certain period of time. In some cases, overnight delivery is desired to maximize the freshness of your sauce. Although slightly more expensive than other delivery options, overnight delivery could mean the difference between an edible sauce and a dangerous one.

Regardless of the agency you choose, make sure your package is safely prepared. Your sauce container should be tightly closed, use tape if necessary. Try to avoid shipping your sauce in glass containers whenever possible, a safer alternative is plastic. If you must use glass containers, be sure to wrap them in bubble wrap or packing foam. It is very important to seal the package well with tape to ensure the safe shipment of your sauce. Lastly, double check to make sure the source and destination addresses are correct. Not only can you lose time during the shipping process, but an incorrect address can make it difficult and, in most cases, impossible to send your package correctly.

A large sector of the transportation industry, among others, is now taking advantage of a special type of capital equipment lease known as a TRAC lease. Also known as Leasing with Terminal Rent Adjustment Clause, it is an affordable way for a company whose main interest is the leasing of vehicles for commercial purposes to finance the final ownership of those vehicles in a more convenient and affordable way.

What is the purpose of said lease?

Instead of going through the hassle of obtaining financing for each truck, because or trailer as needed, a business owner can negotiate a TRAC lease to lease the vehicle for a predetermined period of time and then purchase it from the dealer. end or terminal for agreed price. This allows them to pay monthly rental fees for the use of the vehicle and then pay a fixed price at the end for full ownership.

Negotiated payment amounts are more flexible than other leases, as they can be adjusted during the lease term. Seasonal business operators can pay for the vehicle rental with larger seasonal payments, for example, according to their cash flow options at the time. However, year-round operators can pay adjustable rental payments per month and even incremental payments to speed up the lease if they choose. All of this gives them the use of the vehicle, without having to make a large down payment or pay a lot of financing fees, such as interest, over the life of the lease.

What happens when the lease ends?

When this lease is started, the fixed price per vehicle is negotiated and it is agreed to pay the leasing agent in full when the lease ends. This price is typically a percentage of the fair market value of the vehicle at the beginning of the lease and will not change when the lease expires. Once paid, the full ownership rights are transferred and the business owner can now claim all the tax benefits for the purchase of the vehicle.

If the business owner decides not to purchase the vehicle at the price agreed upon at the end of the lease, the leasing agent reserves the right to sell that vehicle directly to another party, if possible.

If the final sale price is less than the agreed value with the business owner, then the business owner must make up the difference with the leasing agent, since the leasing agent was legally bound to accept that price at the end of the lease. lease. .

If the sale is made for more than the negotiated price to the business owner, then the business owner is owed a refund of the equivalent rental payments they had paid during the term of the lease.

Fiscal benefits

The IRS considers a TRAC lease to be a true tax-oriented lease. By owning, a business owner can claim full depreciation on the vehicle, as well as any pre-ownership rental payments that would be allowed. Tax reform programs led to the creation of this type of lease so that commercial trucking companies could continue to keep newer and better trucks on the roads, allowing expenses to be depreciated as if the truck was owned from the beginning. This is yet another reason why this method is a much cheaper way to finance capital purchases in a tough economy.