Budgeting for Large Equipment Purchases
Feeling the pressure to have more computers or a digital frame alignment machine just to keep up with the trends? Well, relax. Even though making a large equipment investment is a daunting task—especially in this economic climate—thorough research and financial planning, can make it a positive experience that will eventually lead to decreased cycle times and increased revenue. FenderBender talked with Bob Spitz, a shop consultant with Management Success! about deciding when and how to make the most of a large equipment investment. Take-away points from Spitz: do your research both on the product you’re buying—and on the company you’re buying it from—and keep focused on return on investment.
A variety of factors can prompt a business owner to shell out a lot of money for equipment:
• Expansion. Without equipment the shop owner can’t expand.
• Quality. The equipment the shop owner is using can’t produce the quality needed.
• Government intervention. The government will say, “You must now have this kind of equipment.”
In an ideal scenario, there’s a reserve account of money at every shop so it’s not a big struggle to purchase or repair large equipment. But that rarely exists. Even if a shop owner does have money set aside, he has to be willing to spend that money on a piece of equipment, which isn’t always the case because they must have a return on investment.
If you look at depreciation schedules provided by the government, another ideal situation is saying: “OK, I have to take a note out to buy this equipment.” This is smart because it reduces your tax liability. The amount the government allows you to depreciate monthly is then put away toward a reserve account that will allow the shop owner to buy a new piece, if the length of the depreciation is considered.
I can’t think of too many owners who can just shell out $50,000 to $100,000 for a piece of equipment. Plan ahead. Do your due diligence to see if this equipment will be profitable. Ideally, a shop owner should take 3 percent of his sales and put that away every week towards equipment purchasing, because everyone’s going to have to buy equipment.
Let’s say I had $60,000 stashed away for the purchase of equipment. A really smart businessman is not going to take that $60,000 and deplete his reserves. It’s much smarter to take it and buy equipment under a lease option or a loan because the company you purchase it from will have different financing and purchasing options. Then you can write this off as a business expense.
You can also be smart in going after used equipment, especially in the environment we’ve been in the past couple of years. Sadly, a number of shops went out of business. The banks don’t want to own a spray booth, so you can get good deals.
One advantage to buying new over used, especially if it’s a sophisticated piece of equipment, is the training and support service that you may need. That’s an important factor for anybody buying any kind of equipment, whether it’s software or a high-tech optical wheel alignment machine. If you can’t get the training necessary, the equipment is going to be useless. With some used equipment, you can still purchase training on it and get it serviced if it needs it.
I think the reluctance in buying a frame machine depends on the shop owner’s market. If my business model is high-end cars, they’re not going to be totaled as quickly as low-end vehicles. Same for truck collision repair: You’re not going to total those usually.
It’s important to know you’re going to get a return on your investment. And to find a quality company to purchase equipment from that provides good service and training to make sure that your shop can be proficient.