When, How, and What to Buy
Capital expenditures present a host of decisions for PSPs. Choose wisely.
One of the most challenging aspects of our industry is the management of an ever-changing world of technology. While the rapid advances made in digital printing technology create great opportunities, they also present us with significant challenges. And the decisions we make regarding the acquisition of capital assets for our businesses can be very complex. So, let’s examine three key questions to help you in the decision process – when do we buy new technology, how do we buy it, and what do we buy?
When Do I Buy?
Deciding when to buy new equipment is just as important as deciding what to buy. If your business decides to invest in new technology at the wrong time, it can be damaging to your future. Too often, a company purchases a piece of equipment merely because it’s the new “hot” technology before completing a thorough analysis of whether or not it’s the right fit for the business.
If new equipment is replacing existing equipment, the first question should be, “Do I really need to replace my current equipment?” While this may seem like an obvious question, all too often companies purchase new equipment based on an assumption that “it must be a lot better; it’s brand new!” This is not always the case. Sometimes the cost of upgrading existing technology with a new version simply doesn’t justify the improvements that may exist. Use prudent judgment when replacing existing technology by making sure you are adding significant value to your business.
When making a capital acquisition for the purpose of entering a new market, exercise caution. You may find, after purchasing technology in an area outside your expertise, that your customers actually don’t need this new product; they’re perfectly happy with the products you’re currently offering. Before you pull the trigger on the purchase, discuss the impact this may have with your top customers and determine whether or not they’re interested in the new products you will be offering. Research among your customer base will provide invaluable insight into the potential success of a new product.
How Do I Buy?
When acquiring equipment, there are a few options to consider. If you have the cash to buy without financing, that’s your least expensive option. However, with money being loaned at near-record low rates, tying up your cash in equipment may not be the smartest financial approach. You may want to retain that cash for future working capital (current assets minus current liabilities) needs. If you are financing equipment, you’ll probably align yourself with either a traditional bank or an equipment leasing company. In the past, rates have generally been more favorable with traditional banks, but now leasing companies are just as competitive with interest rates and various options for financing equipment.
If you are planning on leasing or financing, then you should be familiar with two basic types of leases: operating leases and capital leases. An operating lease involves the payment of rents that typically add up to an amount significantly less than the value of the equipment over the life of the lease. As a result, at the end of an operating lease, the buyout amount for the equipment will probably be between 25 and 40 percent of the original equipment value. This type of lease is treated like a balloon payment at the conclusion of the lease – or the equipment is returned to the finance company. With technology rapidly changing, this type of lease is becoming more and more rare. Most finance companies and banks don’t want to deal with the task of reselling used equipment after the life of the lease. With an operating lease, the payments are treated as rental expenses on the income statement and the equipment isn’t shown as an asset on the balance sheet, and is therefore not depreciated.
Capital leases, on the other hand, are straight-up finance deals and are booked as asset additions to your business. At the conclusion of a capital lease deal, you will have completely paid for the equipment. The buyout amount on a capital lease is often either $1 or less than 10 percent. This equipment is, of course, seldom returned to the vendor unless a favorable trade-in deal is worked out at the end of the lease.
If you have excellent existing relationships with your current financial institutions, they may very well give you the best interest rates when financing your equipment additions. However, make sure you look at different options. The money-lending marketplace is a very competitive one; with a little work, you can take advantage of that and land yourself a great rate.
What Do I Buy?
Determining what type of equipment to buy is critical to your business. You can negotiate the best possible finance deal available, but if you end up with the wrong piece of equipment you have wasted your money. How, then, can you avoid buying the “wrong” equipment?
One of the biggest risks of buying equipment is acquiring it at the end of its life cycle. For example, a change in technology or the release of an upgrade to equipment shortly after your purchase can create a big disadvantage for your business. Often, the upgraded version will be faster, more efficient, and will provide higher quality output. While there is no surefire way to avoid this, having specific discussions with sales reps about upcoming releases and future upgrades on equipment is always a good idea.
If the asset purchase is significant in terms of costs, extensive research is essential. Attending a tradeshow is an excellent way to learn about technology because you can pick the brains of the technicians in charge of the machine in the booth. They tend to be more open about the good and the weak points of equipment. If a tradeshow isn’t a viable option, consider traveling to the vendor’s location where you can see the machine in action. It’s important to get very comfortable with any significant investment you make.
One of the best ways to get an objective view on a potential asset acquisition is to ask the vendor for a list of current users that you can contact. Talk to as many users as possible to get the full perspective on the equipment; quiz them about what they like and don’t like; and ask them to describe the biggest challenge they have encountered with the machine. Taking the time to research can garner valuable information on the new product.
Managing a business in an industry where technology changes so rapidly is always challenging. By spending the necessary time and effort researching your technology needs, you will make the right decision of when to buy, how to buy, and what to buy. Poor decisions can damage a good company quickly. Conversely, managing your technology needs successfully will ensure a prosperous future for your business.
Read more from our January/February 2016 Spring Ideas issue here.