With 2022 around the corner, those in the green industry sector may be contemplating buying new equipment to replace aging assets or meet growing service needs. With the pressure of another potential busy season ahead, it\u2019s important to make equipment investments that help the business succeed.<\/p>\n
Part of making that decision is weighing the options of whether to lease or buy new equipment. While it\u2019s imperative to plan for purchasing as part of the annual budget planning process, as with all purchases, there must be financial justification, points out Steven Cohen, a senior business consultant for GreenMark Consulting Group, a company based in Henrico, Virginia serving landscape and snow business professionals.<\/p>\n
\u201cFirst, determine if you really need the equipment,\u201d he says. \u201cMany landscape business owners justify need by what I call the \u2018I Want Syndrome.\u2019 They purchase equipment because they want it but did not spend the time to determine if they really need it or can afford it.\u201d<\/p>\n
Cohen says he justifies a purchase with an understanding that equipment can be used an average of eight months per year for an average of 75% of the time in any given month.<\/p>\n
\u201cSecond, ask if you can afford the payments,\u201d Cohen says. \u201cYou must look at all costs: purchase cost, maintenance, major breakdown expenses and depreciation. By determining your cost to own, you can then determine your cost to operate.\u201d<\/p>\n
The income for the equipment over the calculated period should be no less than 2 to 2.5 times operating costs, Cohen notes, adding that anything less calls for renting equipment on a project-by-project basis.<\/p>\n
Fred Haskett, a principal partner at TrueWinds Lawn and Landscaping Business Consulting, Lake St. Louis, Missouri, says in approaching budgeting, he uses a formula that starts with creating a business plan that considers equipment, safety, financials and sales.<\/p>\n
Consider the current reality of the business in its particular area. Look at where it stands in regard to existing equipment and its growth plan with a goal to drive the business to establish the capital expenditures for new equipment or replacement.<\/p>\n
Then take on a second consideration: the company\u2019s goals and what is needed to attain them.<\/p>\n
Finally, establish a road map for what equipment is needed and when it will be needed.<\/p>\n
\u201cBecause of the seasonality of the business, purchasing at the beginning of the year for everything is not necessarily the right thing to do,\u201d Haskett notes. \u201cIf it\u2019s for a fall service, seeding or aerating or for irrigation equipment, when do you need it? Establish that you\u2019re not buying things prematurely and having them around not generating revenue.\u201d<\/p>\n
Buying equipment can be a good option for business owners with enough available cash or credit and confidence that the asset will be used for a long time, notes the Small Business Administration. There are benefits of buying equipment: depreciation can be claimed on taxes, the lifetime cost to buy is usually less than leasing, and it can be counted as an asset on the balance sheet. The disadvantages are that cash or credit is needed upfront, there is less of an opportunity to test out the asset and the owner could be fully liable for maintenance and replacement.<\/p>\n
Buying assets with cash means one can own it in full right away, but there also will be less cash available to cover operating expenses, the SBA advises.<\/p>\n
While loans can offer some of the same benefits of leases by distributing the total cost over a longer period, it means paying more in fees and interest than buying outright with cash.<\/p>\n
Leverage credit lines with the bank or seek other sources for business funding, the SBA advises.<\/p>\n
It\u2019s always a good idea to analyze the market for future equipment purchases, notes Haskett.<\/p>\n
\u201cIf you\u2019re adding a service line, you want to tiptoe and then walk before you start running,\u201d he says.<\/p>\n
A good relationship with a small- to medium-sized financial institution helps business owners get the best terms, especially given the tight supply chains in the existing market. Smaller-sized financial institutions are more apt to suggest where a business owner can get a better deal \u201cbecause they\u2019re trying to buy your loyalty,\u201d Haskett notes.<\/p>\n
Acknowledging the supply chain challenges over the past year, Haskett advises business owners talk with salespeople and vendors about a reasonable timeline for getting equipment.<\/p>\n
\u201cRight now, it\u2019s a little longer than it has been in the past,\u201d he adds.<\/p>\n
It\u2019s also critical to understand the cash flow of one\u2019s business as well as the value of the service being provided, Haskett notes.<\/p>\n
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Consider the type of work for which equipment purchases will be used. Then analyze whether a piece of equipment fits into the company\u2019s current pricing strategy or if price adjustments need to be made to accommodate its purchase, \u201ctaking into consideration that you\u2019re not going to buy something you won\u2019t be able to get a return on investment for in your current pricing schedule and current marketing aspects,\u201d says Haskett.<\/p>\n
Dealer support is critical. \u201cA lot of people buy the cheapest equipment they can find,\u201d says Haskett, noting he used to do that himself. \u201cI realized the pricing value is the performance of the equipment and the dealer support network. Or if I have an in-house mechanic, is there going to be training necessary for them to maintain the equipment?\u201d A savvy business owner knows how to leverage the best price and best financial terms, says Cohen.<\/p>\n
\u201cMy suggestion for both is simple: Shop it, bid it and then buy it, meaning check your equipment pricing at a minimum of three equipment dealers. Don\u2019t have them price the equipment. Have them \u2018bid\u2019 to earn the sale,\u201d he adds.<\/p>\n
\u201cAll equipment dealers have multi-tier pricing levels. In a competitive market, most likely one vendor will be more competitive than another.\u201d<\/p>\n
The same holds true of financing, says Cohen.<\/p>\n
\u201cMost industry-specific finance companies offer an array of payment terms, interest rates based on credit worthiness and amount required to put down,\u201d he adds. \u201cTypically, an industry-specific finance company will be able to offer more favorable terms versus a conventional lending institution.\u201d<\/p>\n
Renting and leasing are other alternatives that help keep companies competitive when purchasing doesn\u2019t make financial sense. \u201cA rule of thumb is to rent until the cost of renting exceeds the cost of ownership,\u201d says Haskett.<\/p>\n
Case in point: Haskett\u2019s company used to rent air compressors for the fall blowout seasons for its maintenance operations. \u201cWe didn\u2019t have a use for an air compressor the rest of the year,\u201d he adds. \u201cWe only needed it for 60 days, so we rented it because it was much cheaper to rent them than to own them.\u201d<\/p>\n
Sometimes, it takes working with a vendor to make the choice that\u2019s best for one\u2019s business, Haskett says. He\u2019s worked with rental shops with good reputations that didn\u2019t carry particular pieces of equipment that he recognized as useful to landscape contractors. Talking with them, he showed them the rental value of acquiring that equipment.<\/p>\n
Some manufacturers offer leasing programs, Haskett points out. \u201cSometimes leasing is an avenue for saving money or not having to negatively affect your balance sheet,\u201d he adds. \u201cYou should look at purchasing, renting and leasing from a situational standpoint so you\u2019re making the best decision for you right now.\u201d<\/p>\n
Leasing is an option for those who need to quickly get a lot of equipment or if the equipment needed is expensive. In some cases, leasing can be less expensive than purchasing with a high-interest loan, the SBA notes. Among the advantages of leasing is needing less cash or credit upfront. A short-term lease allows an operator to test out the equipment. Maintenance is sometimes included at no extra cost. Lease payments for business assets are typically tax deductible.<\/p>\n
The SBA notes leasing disadvantages: The lifetime cost is normally higher than buying, equipment replacement when the lease expires could be expensive and depreciation of leased assets typically isn\u2019t tax deductible.<\/p>\n
There are two general lease types: operating and capital. Each have different accounting procedures and can have a significant impact on business taxes. An operating lease works like a traditional rental. It does not get added to the balance sheet. Payments are operational expenses. There is low maintenance, risk or tax obligations. A capital lease works more like a loan, according to the SBA. The asset is owned for accounting purposes and is added to the balance sheet. Depreciation and interest expenses are claimed, and one takes on all maintenance, risk and tax obligations.<\/p>\n
Leases sometimes have buyout options enabling the business owner to fully purchase the asset at the end of the lease. The length of a lease can vary, with shorter leases having higher monthly payments. Leaving a lease early can mean facing steep early termination penalties. The SBA advises having an attorney review a lease before signing, especially if any of the terms or conditions are unclear.<\/p>\n
Cohen advises to be conservative in making smart financing decisions on equipment this year.<\/p>\n
\u201cWhile we have been operating for the last few years with a real uptick in business activity, it is in my opinion that sometime in the next 12 to 18 months, we will be in a more conservative business climate,\u201d he says. \u201cCyclically, our economy is going to tighten, which will lead to a downturn in consumer spending. Business owners must be smart in preparing for a possible ebb and flow in the economy.\u201d<\/p>\n
Hiring a consultant is one of the best ways to help make sense of the market, establishing service lines and making equipment investments, Haskett points out.<\/p>\n
\u201cWe\u2019re reading the market on a regular basis because we are managing small- and medium- sized businesses and the day-to-day. It\u2019s complicated enough without trying to read the tea leaves on macroeconomic things,\u201d he adds.<\/p>\n
Haskett advises his clients to look at their equipment and determine whether it is time to replace equipment that\u2019s wearing out while interest rates are still low.<\/p>\n
It\u2019s also worth considering selling off pieces of equipment that are not providing a good return on investment because it\u2019s only being used a few times a year, which goes back to the rental consideration, Haskett says. He\u2019s telling his clients to check pricing and wages and prepare for the possibility of changing inflation.<\/p>\n
\u201cMake sure they have enough recurring revenue services and not one-off services, because in a tight market, one-off services go away,\u201d he adds. \u201cLook at your balance sheet, look at your debt, look at equipment loans that are at higher rates or close to being paid off, so you can start to accelerate that and improve your balance sheet by reducing some of your debt service.\u201d<\/p>\n
Plan ahead to make growth-focused equipment purchases.<\/p>\n","protected":false},"author":15,"featured_media":3819,"parent":0,"template":"","main-categories":[25,32],"class_list":["post-3599","features","type-features","status-publish","has-post-thumbnail","hentry","main-categories-business","main-categories-equipment"],"yoast_head":"\n