Capital & Planning Expenditure
Fail to Prepare and Prepare to Fail
Capital and expenditure in the business, should involve great planning.
It will usually be within your control as to when you make large purchases or commitments, such as new premises, machinery, vehicles or plant. You therefore have flexibility as to how and when the investment is made, to ensure it is not at a time that will cause a cash flow problem. Sometimes, an unplanned expenditure will need to be incurred and may be difficult to finance.
Planning is key as to when you make such commitments and how. Wherever possible, careful consideration should be given to the options and a pragmatic decision should be made as to whether the investment is needed at all. Whilst something shiny and new might be nice to have, is it absolutely necessary and beneficial for your business?
You need to carry out your research and calculate the cost implications and commercial advantages of the various options. If you are considering buying, how long will it take to pay off, what added benefits does it provide and what additional costs does it create?
Below we give our thoughts on some of the typical business expenditures.
Property / Premises
Premises can be expensive and will tie up money. Most businesses prefer to lease on a short to mid term basis, potentially with a break option, to give themselves flexibility and without being tied up for too long.
In the current economy, there are many landlords offering much more flexible terms and incentives, compared to the property market before the recession. Vacant properties still require commercial landlords to pay business rates. Many landlords see the benefit of having a tenant in paying the rates and some rent, rather than it sitting there empty and costing money each month.
Plant And Machinery
This is most relevant to manufacturing businesses. Whether to buy or lease will be a decision based upon the particular business and the equipment itself.
Is the machinery necessary at all? Could the process be sub-contracted to someone else? If so, at what cost?
If you buy the machinery, how long will it last and what will be the running and maintenance costs? Would it be less hassle to lease and get the provider to deal with maintenance issues?
If you decide your business needs the equipment and need to buy it, do you need to buy it new or could it be bought second hand for a cheaper price? Does the purchase price need to be paid in full straight away or over time by instalments?
Are they needed at all? If so, do they need to be brand new? New vehicles can devalue quickly. Old vehicles may cost more to maintain.
Vehicle leasing has become much more common and popular in the past few years. The costs and benefits of both options need to be weighed up.
Buy Or Lease?
If you have decided you need the thing (premises, machinery, etc) for your business, you need to decide whether it is best to buy it or lease it. Generally, a large proportion of small and medium sized businesses lease things, either through choice or because they cannot raise the money to buy.
The terms of the lease will determine whether it is right for the business. The devil is in the detail and you need to carry out calculations and compare.