Each year we need new equipment – a major business purchase. There’s never enough cash in the bank. The loan payments are tough to handle. We go to a third party for financing because our bank doesn’t want to deal with us.
Thoughts of the Day: Timing a major business purchase of major equipment is crucial. Don’t assume you have to buy everything. Fitting expenses into a budget can help predict what you can and can’t afford. There are tricks to tying together the P&L and Balance Sheet so you can see what’s really going on. Make sure your equipment is used as productively as it should be.
Making a major business purchase
Most owners like to plan for the busy season, getting all their ducks in the row so they can handle the increased workload when it hits. Unfortunately, ramp-up time is also cash drain time. Payments for pre-orders of equipment and materials plus salaries for field employees who are just starting back to work combine with a slow start to invoicing and a waiting period to get paid. Lots of expenses and very little money coming in is the wrong time to bring on additional payments.
Use a budget to plan out costs. Figure out what you can really afford, and when. Estimate repair costs and downtime for repairs on existing equipment. Compare that to new equipment loans. Factor in time and expenses for tuning and adjusting the new equipment.
Avoid pre-buying materials, equipment, and personnel just to “get ready”. Delay purchases as long as possible. Plan things out to maximize cash flow. Build into the budget cash set-asides for next year’s purchases.
When it’s time to replace old equipment with something new, make a plan to sell off used equipment at the height of the season. That’s when buyers are most likely to pay a premium to fill in holes in their equipment roster. It may be cheaper to rent some equipment for a short season, especially when you’re not sure how much you’ll use it or how long you’ll need it. A total of 1-2 months of high rental cost can be less than 12 months of payments on the equipment you don’t need in the future.
If down payments are a problem, try leasing. Keep cash in the bank by avoiding a down payment. And the lease payment only shows up as an expense on your P&L – which means you don’t add to liabilities on your balance sheet.
Look to have equipment leases and purchase payment plans begin during the busy season, with equipment arriving on a just-in-time basis for the really busy periods. That may mean a little more disruption swapping equipment in and out at the height of the season. Figure out how to handle the disruption while benefitting from new equipment immediately going into use and earning its keep.
Tax planning can get in the way of seeing what’s really going on with cash. Accelerated depreciation and principal payments on the balance sheet make things confusing. Make sure that loans are properly categorized as long-term liabilities, with only the current year’s obligation in current liabilities. When looking at the P&L remember that interest is not the full amount due on a loan. Know the difference between accelerated depreciation and the amount of depreciation that matches the principal you’ll be paying down each year. Get help if you’re not sure.
Finally, ask yourself some critical questions. Do I really need that new equipment? Will it make my crews that much more productive – enough to pay for themselves? Can I run a second shift with the old equipment? Will a good refurbishing program in the slow season get an extra year of life out of the equipment I already own?
What happens if the season is slower than expected? Most equipment can’t be returned for a full refund. Delay delivery on new stuff until you’re sure things will pick up. It may be cheaper to pay a penalty and cancel an order than to have to make monthly payments on something you don’t need. Be smart about what you spend, and when. It could mean the difference between profit and loss for the year.
Looking for a good book? Spank the Bank: The Guide to Alternative Business Financing, by Karlene Sinclair-Robinson.
