Each year we buy a fair amount of new equipment. 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?
This is an operations question. Ask your operations people to put together a request wish list. Ask your bookkeeper to help them plan out a budget. Carefully select the vendors to work with. Use both the wish list and the budget to stay on track. If you need any tools to help you do this, give me a call.
Ask your operations people, the people doing the work, to review what they have and make a list of what they think needs to be replaced and added. Against each item on the list, have them identify:
- When the item will be needed.
- Is it critical or simply helpful: try a scale of 1 to 4, from “nice to have” to “can”™t do the job without it”?
- Is it 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?
Define the equipment advantages:
- Is there something unique about the equipment that would help the company competitively?
- Will it help get more jobs?
- Will jobs be more profitable once the cost of acquiring the equipment is factored in?
How does purchasing new compare with 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 a 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.
Look at what was spent last year, and how that compares with what”™s needed for this year. Compare equipment purchases with 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 vendors. Consolidate purchasing and insist on bids, to get the best prices. Define the return and replacement policy before you buy. Build a relationship with the selected vendors, so they get to know your company”™s expectations as you work together. Issue POs to document expectations about timing, financing, equipment specifics.
When deciding on what to buy, and when, 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 might use the equipment to attract additional, profitable clients.
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. Ask customers for upfront deposits to help pay for equipment ordering.
If you”™re still stuck, give me a call. We have some tools that can help you figure out your plan of attack.
Looking for a good book? Try “Equipment Management Workbook” by Paul D. Tomlingson.
Andi Gray is president of Strategy Leaders Inc., www.StrategyLeaders.com, a business consulting firm that specializes in helping entrepreneurial firms grow. Questions may be e-mailed to her at AskAndi@StrategyLeaders.com or mailed to Andi Gray, Strategy Leaders Inc., 5 Crossways, Chappaqua, NY 10514. Phone: 877-238-3535. Visit www.AskAndi.com for archived Ask Andi articles.
