Imagine flipping the light switch in your truck bay and seeing the fluorescents light up a fleet of modern, safe trucks. This is a nice image, but one that is hard to bring to fruition when costs are rising and budgets are shrinking. A comprehensive fleet replacement plan and the discipline to work the plan can make that vision a reality.

Many departments use a truck replacement schedule to determine fleet upgrades. This is a critical first step, but it falls far short of developing a comprehensive fleet replacement plan. Creating just a replacement schedule is like having a wish list but no money to buy anything.

A comprehensive plan includes the schedule and the budget for a properly replaced fleet. There are four key steps in developing a comprehensive fleet replacement plan.

Step 1] Inventory and plan the fleet

This is the critical first step that many departments already are doing. This step involves writing down every single vehicle that a department owns and determining when it should replace each vehicle.

After inventorying the fleet, develop replacement criteria — age, mileage, hours, condition. Determine a year that each vehicle will have to be replaced according to the schedule.

A department must have defensible reasons for replacing its fleet. Local politicians need to know that spending this money is responsible, so each replacement should be measured against some definable cost, whether in terms of firefighter or community safety, the technological obsolescence of the old truck, or the costs of repair and maintenance.

A comprehensive plan also includes more than just vehicles. Will a fire department see any large costs with stations such as additions, renovations or new construction within the planned time frame? If so, these projects should be factored into the plan for the year they're expected. The same goes for any anticipated large purchase of essential equipment such as bunker gear or SCBA.

Step 2] Develop the future budget

A comprehensive fleet replacement plan includes both the replacement schedule and the necessary capital and operating budget. The next step is to develop the financial road map that will pay for the new fleet.

It's important to include all the financial factors to ensure the plan is complete and accurate. The key is to analyze the financial factors that will control the future budget.

Project revenues

This can be a daunting calculation, but most of the information already is in a budget manager's head or at his or her fingertips. Start with the past three years' revenues. Eliminate all the non-recurring income, such as grants. These numbers should provide an accurate repeatable revenue amount. Project future revenues from this amount.

What will happen to revenues over the next three to five years? Based on the past three years, will they increase, stay stable or decrease? For some parts of the country, the historical tax base is declining, and departments should plan accordingly.

With a general sense of revenue trends, estimate a percentage change using actual experience as a guide. How much has repeatable revenue increased over the past few years: 3%, 5%, 10% or even more? Will the rate increase at the same pace, lower pace or higher pace? For example, if revenue has increased at an average of 4% per year over the past few years and there is a consistent growth rate, use 4% to increase revenue each year. For lower expectations, use a lower percentage, perhaps 2% or 3%. For higher expectations, use a higher percentage such as 5% or more.

But don't get too optimistic. There is a common psychological practice of overestimating revenue high enough to meet needs. It's easy to think the future will be brighter, but that is not always true. Be realistic when estimating revenues.

Will the department have certain increases such as tax levies or tax bases with new plants or developments? Are fund-raisers or donations expected be much higher for some reason? If so, then include these amounts in addition to the percentage revenue growth. Perhaps a new levy or contract will provide another $50,000 or $100,000 beginning in a certain year. Add that amount to the expected percentage revenue change to get a fairly accurate revenue estimate.

Project operating expenses

This follows a similar path as revenue projections. Determine recent repeatable operating expenses. Calculate the historical annual growth rate. Examine if the expense growth rate will be higher, the same or lower than recent experience. Finally, project future expenses based on recent experience and at the calculated growth rate. Be sure to specifically include any significant expenses that will grow beyond the expected inflation rate such as insurance premiums or fuel.

Examine capital expenses

Departments spend money on two types of expenses: operating expenses such as insurance, payroll, fuel, utilities, repairs, maintenance and the like and capital expenses for large purchases such as new trucks, stations, loan payments or large equipment purchases.

The funds remaining after operating expenses are paid out from revenue are commonly called cash flow. This is the amount of money left to spend on large discretionary purchases (or to save to increase cash reserves) each year.

For a comprehensive plan, project what capital purchases are made each year. Analyze the past few years of purchases and again calculate if they will rise, fall or stay the same.

For example, does a department need to buy 15 sets of SCBA and 10 sets of turnout gear each year? If so, include that cost into the plan. If a department has loans, include the payments until the loans are paid off. Loan payments are a capital expense, as they were used to buy a capital item such as a truck or station.

Subtract operating expenses and capital expenses from projected revenues to determine cash flow for new trucks.

Step 3] Predict future purchase costs

An often-overlooked factor in fleet plans is the reduced buying power as each year goes by. A comprehensive plan includes the future cost of the truck being purchased.

Many replacement schedules have been sidelined when the time comes to buy the truck and the bid prices are 20% to 50% higher than expected. Most often, this unexpected increase results in the decision to do nothing — stopping the plan in its place.

But a comprehensive plan includes the future cost. For example, if the truck costs $300,000 today, and truck prices are expected to increase 5% per year, that same truck will cost $382,884 in five years. If a department budgets $300,000 in 2013 to replace the truck, the plan will be off by over $82,000. It's key to prepare for a higher future cost.

In this example, plan to set aside $382,000, not $300,000, in 2013 to replace the truck. And plan on higher prices for the other future trucks also.

The future cost of the truck is more than the asking price; it also includes the cost of financing. Given the current economic situation, that area may be up for grabs.

The federal government intervened to keep financial companies Goldman Sachs and Morgan Stanley and insurance giant American International Group from going under. It did not push money into Lehman Brothers when it failed, but did seize Washington Mutual to allow JP Morgan Chase to buy the floundering bank in a fire sale. At presstime, representatives from the Bush administration and Congress were trying to negotiate a bailout plan for the collapsing financial industry that could be as much as $700 billion. The result has been a banking industry that is less able to and less confident about lending money.

What all this means is that for most people and businesses it is harder to get a loan. Some are being hit extra hard by this credit crunch — mostly those with bad credit and businesses that deal with real estate and housing. However, the fire service industry has not been closed off to loans by the credit crunch. Fire departments still can borrow money at reasonable terms.

But fire departments are slightly impacted by the general state of lending today. All lenders are assessing a risk premium based on the uncertainties in the current situation. In other words, because banks really don't know how bad things may get or how long this situation may last, they are charging a slightly higher interest rate.

This premium is a little less than 0.25%. That means if a department would have borrowed money last year at 4%, this year it would borrow the money at 4.20%. That's not a huge difference but it does change what a department pays for borrowing money.

Step 4] Work the plan

When I've developed purchasing plans for departments, often I am asked, “Will we really have that much money in 2019? Or will we really be broke in 2016?” The answer is probably not. The plan is not an exact picture of what the future will be like. It's more like a road map, providing a sense of direction and a path.

The key factor is to use the plan to chart a course and stay on track each year. Future revenues, expenses and truck costs will not be exactly what a department planned in 2008. They may be higher or lower.

So what's the purpose of the plan at all? The purpose is to help a department know if it is heading in the direction of the primary goal — a fully funded modern fleet replaced according to a set operational schedule, not the financial whims of FEMA or local government.

To work the plan, the department must update it each year by examining results and assumptions. What were the actual revenues, operating expenses, capital expenses and truck purchase or financing costs last year? Were they close to the projected figures or were they way off? If they were off, what needs to happen to get back on track — raise more revenues, cut back on expenses or something else entirely? Are truck prices growing faster or slower than budgeted?

A comprehensive fleet-replacement plan is a fully developed replacement schedule and a financial budget designed to ensure that funding is ready when a department needs to replace its trucks. If a department doesn't have a plan to measure where it should be, the budget manager doesn't know how the department is doing.

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John R. Hill is president of Envizion Financial, a financial services firm that specializes in helping public safety organizations fund and purchase fire trucks.