Know The Real Cost

Price is only one factor in determining how long it will take a new piece of equipment to return a profit.

Interested in General?

Get General articles, news and videos right in your inbox! Sign up now.

General + Get Alerts

So you’re all ready to buy a new piece of equipment for your business – maybe a trailer jetter, a new truck or a sewer camera.

You’ve settled on your preferred model, figured out your financing and made room in your budget for payments. Now, hold on. There are two more questions you must always consider before making a major business purchase.

No. 1: How soon will that new gadget pay for itself? And No. 2: What is owning it going to cost you?

You really need to know the answer to the second question if you’re going to accurately answer the first one.

The cost of owning something isn’t just the purchase price or even the cost of the loan – it’s all the additional expenses that come along with it.

If you have always ridden a bus to get anywhere and one day buy a car to save on bus fare, you’ll take on other expenses: buying gas, paying auto insurance premiums, paying for repairs, or even for your state registration and license fees. Those will all be part of the cost of owning that car – not just the car’s price and your finance charge.

Business equipment is no different. Everything your business owns incurs some cost of ownership, however small. Some are easy to figure out; others are more complicated. Some you can only guess at.

Business decision

“This is a business decision,” says Paul Schwada, a Chicago-based business consultant. “The choice is essentially a decision to invest in the business in a specific area, and there are some bigger-picture considerations than just the obvious numbers.”

Jamie Smith agrees. He’s a certified public accountant who owns Mr. Rooter of Greater Baltimore. There’s another side to ownership cost, he points out – the cost of not owning that new machine.

Maybe you’re getting by with an existing device you’ve adapted to the task. If the new machine can allow you to do the work a lot more efficiently, it might allow you to bill more jobs in less time.

Or, says Smith, “If you don’t own this piece of equipment and you’re having to rent it, that’s significant. If you own this equipment, would it help you sell the jobs more quickly? Do you lose jobs because you can’t get to it for two days because you have to set up a rental?”

Against the cost of non-ownership, in rentals, lower efficiency or both, you’ll also need to weigh the costs of ownership: debt payments, insurance, maintenance and more.

Armed with that information, you can begin to calculate how soon the machine will pay back – in revenue and profits – the costs you’re taking on when you buy it.

Questions to ask

In making those calculations, it’s reasonable to project what additional business you might gain by having the new tool in your possession – so long as you’re realistic in your forecasts.

Schwada advises asking yourself several questions about your prospective purchase. These can point you to some deeply hidden potential ownership costs.

Does the new piece of equipment fit your operation? Or, instead, does it represent a big change in size or function from what you’ve used before?

If the purchase is a lot different from what you’ve used before, be prepared for it to be used less. Employees might not really “get” how to use this new device, or they may simply prefer old, familiar options.

In the best case scenario, maybe they’ll just need extra training to get comfortable with using it. That’s another cost of ownership but one that will ultimately pay off.

In the worst case, though, maybe its design makes it too difficult to use. If a new piece of equipment just sits idle because no one wants to use it, your projections about the revenue it will fetch will end up being way too rosy, Schwada warns.

You’re the best judge of whether the new tool makes sense for your business, says Smith. “Don’t be tricked by a salesperson telling you, ‘Everyone else has one.’ Maybe they’re sorry they bought that piece of equipment; if it’s sitting around, it’s just a drain on your operation.”

Does it overlap equipment you already have? “Almost every new piece of equipment – once in use – does some things that you used to do with other equipment,” Schwada notes.

That could be good or bad. If your older equipment stays back at the shop all the time as a result, think about unloading it to recapture some dollars. But if you can still use both the old equipment and the new tool, maybe you’ve increased your capacity for certain kinds of jobs. If there’s a real market, that can be great.

How realistic is your plan for the new equipment? You may hope to expand into some new specialty line of business. Be realistic about the actual opportunity.

“You won’t want to invest in a significant piece of equipment for a new area of business without a good guess on the likelihood that it will pan out,” Schwada says.

If you’re already fulfilling customers’ requests with existing equipment in place of specialty equipment you plan to buy or by renting specialty equipment – or if you are having to turn down lots of requests for a particular service because you lack the needed tools – you can probably have some confidence in the future possibilities. But again, be realistic. Don’t get caught up in overly optimistic scenarios.

Before you make any major capital investment in your business, take time to figure out its real return – how soon it will add to your bottom line instead of just eating away at your top line.

Then you’ll know whether it’s worth the money you plan to spend in the first place.



Discussion

Comments on this site are submitted by users and are not endorsed by nor do they reflect the views or opinions of COLE Publishing, Inc. Comments are moderated before being posted.