Each year we buy a fair amount of new equipment for our business. I usually just start buying what we need when cash is available, or use our credit cards when I find something at a good price. It usually works out, but sometimes I’ll buy something we don’t need, or get caught short of funds later on. This year I’d like to be more organized. Can you help me with an equipment budget – how to start – how to decide what’s most important, when do we have money, and what’s the role of ROI (return on investment).
When building a budget for equipment purchases in your business, the first place to start is with your operations team. Ask your operations people to put together an equipment request wish list. It’s always a good idea to keep a running list of equipment requests on hand. This way, when the new budget season comes around, you’ll be prepared with a list of items that your operations people need.
If your business has a bookkeeper or internal finance person, ask them to help the operations team. This will ensure that the team has access to accurate and up-to-date financial information. Carefully select the vendors to work with. Use both the wish list and the budget to stay on track.
Ask operations people
They’re the people doing the work, to review what equipment they have, and make a list of what equipment they think needs to be replaced and/or added.
Against each equipment item on the list, have them identify the following:
- When the item will be needed by operations
- Is it critical or simply helpful: try a scale of 1 – 4, from “nice to have”, to, “can’t do the job without it”
- Is the equipment on the list as a replacement or addition to the equipment portfolio
- How else might the equipment be used, beyond a particular job
- What’s the maximum amount they’d be willing to pay for the item
Then ask them to define the equipment advantages for your business:
- Is there something unique about the equipment that would help the company competitively?
- Will the equipment help us get more jobs? Is this something that customers are asking for?
- Will jobs be more profitable once the cost of acquiring the equipment is factored in?
Budget for repairs and maintenance in your equipment budget
- How does purchasing new compare to repairing what is already in place?
- How much refurbishing work would go into bringing used equipment up to speed?
- Is there much of a price difference in new versus used, after factoring in purchasing costs?
- On new equipment, does it make sense to purchase, or just lease?
- If leasing, do you want to return the equipment or buy it?
- Check with your accountants on write-off implications.
Work up an equipment budget and a list of possible vendors
Get your bookkeeper to take the lead on the numbers side of the project, so that you and your operations people can review, rather than getting caught knee-deep in the numbers. Now that you’ve built an equipment budget, it’s important to monitor and review the budget regularly. This will help ensure that your business is making the most efficient use of its equipment budget.
Compare what was spent last year to what’s needed for this year
Compare equipment purchases to forecasted revenue for this year. Consider how cash is expected to flow in this year.
- Will you need financing or can you handle purchases out of cash flow?
- What ratio of revenue and gross profit is likely to be chewed up with equipment purchasing?
- What can you realistically afford to spend?
Evaluate potential equipment vendors.
- To get the best prices, consolidate purchasing and insist on bids. By consolidating purchasing and requiring bids, you’ll always get the best price. The best way to ensure you’re getting the best price is to consolidate purchasing and require bids from vendors.
- Define the return and replacement policy before you buy. Be sure to familiarize yourself with the return and replacement policy before completing your purchase. That way, you can be certain that you know what to do if you need to return or exchange a piece of equipment.
- Build a relationship with the selected vendors, so they get to know your company’s expectations as you work together. Building relationships with vendors is an important way to make sure they understand your company. Get to know them, introduce yourself and your company, and explain what you do.
- Being friendly and personable with vendors ensures that they’ll be more likely to want to do business with you. Ask about their business, their day, their family—get to know them on a personal level. Once they get to know you and see that you’re interested in them as people, they’ll be more likely to want to help your company succeed.
- Issue PO’s to document expectations about timing, financing, and equipment specifics. When issuing purchase orders, be sure to document any expectations regarding timing, financing, and equipment specifications. This will ensure that everyone is on the same page and can avoid any misunderstandings or potential problems down the road.
Decide what and when to buy
Include time for testing and learning to operate the new equipment.
Think about what you’ll do with the equipment next year – sell it, repair it and put it back into use, throw it away. Think about how you can use the equipment you have to attract additional, profitable clients. You might be able to offer new services or target a different market. What can you do to stand out from the competition? If you’re not sure, ask your clients what they would like to see from you. This way, you can ensure that you’re meeting their needs and providing them with the best possible service.
Lay out a timeline of purchases and repairs, based on budget and priority.
Arrange for financing well in advance of when it might be needed. Check with vendors on delivery lead times. Ask for terms to close the gap between the point of ordering and when the equipment starts to produce revenue. One way to help pay for equipment orders is by asking customers for upfront deposits. By doing this, businesses can receive the necessary funds to cover the costs of their equipment. This allows businesses to avoid taking out loans or using other forms of financing, which can be costly in the long run. Asking for upfront deposits is a simple and effective way to help businesses manage their finances and get the equipment they need.
Figuring out what you need and want in terms of equipment can be daunting, but it’s a crucial part of growing your business. By taking the time to build an equipment budget, you’re ensuring that your business has the tools it needs to succeed. If you’re still stuck trying to figure this out, give us a call. Our team is more than happy to help steer you in the right direction when it comes to choosing the perfect machines for your business.