26 Feb How Do I Decide Whether To Upgrade My Business Equipment Or Not?
How Do I Decide Whether To Upgrade My Business Equipment Or Not?
You may have been putting off upgrading your business equipment because you don't have the surplus funds right now or you don't want to commit your scarce resources to a single item that will leave you with little capacity to do other things in your business. However, at some stage you will need to bite the bullet and make a decision. If you wait until the money is in your bank account, it is likely that you will never be able to afford it.
However, if you look at investing in new equipment from the point of view of the cost savings or increased revenue you will get from making the investment, then this can change the way you look at the situation. The key here lies in the word invest. If we make an investment in our business, we expect to make a positive financial return on this investment. If you take a look at the cost of the investment and balance this with the potential return that will be generated by the asset over its useful life, then it may make sense to go ahead and make the investment.
However, there is a caveat to this. You cannot simply raid your bank account to make the investment simply because the cost benefit analysis came up positive, even if you have an overdraft from your bank that will cover the cost of the equipment. It is a bad idea to use your working capital to fund significant asset purchases, even if you have the cash right now.
The right way to do this, once you have worked out the useful life of the asset being purchased, is to work out the cost of funding the asset with a loan or leasing facility that matches the useful life of the asset. In this way, you are paying for the equipment while you are using it, and you are avoiding a serious drag on your bank account at the time of purchase.
Bank funding has been hard to get in recent years but you will probably find that loans or leasing are still available for many types of equipment purchases. If your own bank is not prepared to support you, there will undoubtedly be lots of other specialist equipment leasing companies that will be happy to help you make your purchase. You may even get to enjoy tax breaks for making the investment.
In summary, for assets with a multiple year useful life, you should pay for them over their useful life. For assets, with a useful life of less than one year, pay for them over less than one year. If you expect a positive financial return versus the cost, then it is sensible to make the investment by funding it with a matching loan or lease facility.