Investing in new equipment sounds like a smart move but it can be a risky one. If it doesn’t pay off or it causes your business to lose money, then you might end up on the losing end of the deal. You must ask yourself a few questions before finalizing the purchase. They will allow you to better understand whether it is a good idea or not.
Here are some of the questions you should ask:
How Much Will This Cost The Company?
The first question that you have to ask is how much will it cost the company. This is the first barrier against purchase. If your company can’t afford the new equipment, you simply should not get it. But besides the base price, there might additional factors that can affect the cost. For example, your company might be able to get a deal with the supplier. This might knock down the cost a bit. Additional discounts and deals might also help with making the costs a lot more manageable.
Where Will The Company Get The Money?
There is also the question of the funds that your company has available to it. When buying new equipment, the default option is to draw on company funds. If that is your choice, then you need to check how much money you have available. Running a company costs money and you might have a running tally of expenses that will tell you if you still have funds for a purchase.
Besides paying with company funds, you can choose to use credit. You can take out a loan or a use credit card. Loans are more reasonable with better rates. Credit card payments can have you paying high interest and trying to catch up on monthly payments.
Is It Tax Deductible?
Another important question about the purchase is deductible from the company’s taxes. This can mean a lot since you’ll have less tax to pay. As a general rule, if the equipment is used for business purposes, they are eligible for deductions. This might even apply to both state and federal taxes so the reduction can be a big bonus. Talk with your accountant to confirm the tax-deductible status of your purchase.
Will There Be Additional Costs?
Besides the initial purchase price, you should also check whether there will be additional costs involved in using the equipment. For example, you might have to buy an air filter for your air compressor so that it only releases clean air. This is essential if your compressor will be used with food products. It is not just additional parts and upgrades.
It might also cost you to train your employees on how to properly use the machine. This can also delay its use. Another expense is repair and maintenance. You need to keep it in good condition so that you can get your investment back but the more repairs you do, the lower your profit margin.
How Will It Earn Back It Costs?
There is also the core question of how the new equipment will benefit the company. There are several advantages to using new equipment. For example, your new purchase might allow you to produce more than you previously did. This can mean that you have more products to sell. An additional way for the new equipment to pay for itself is to lower the costs of production by being more efficient. It might also allow you to produce new products.
Calculating how much your potential profits are can help you estimate how long you need to use the equipment before you can earn back your investment. After earning back its cost, it will be pure profit to use the equipment.
Can It Wait?
A final question that you have to ask yourself is whether the purchase can wait. Most of the time, the answer is yes. Waiting to purchase a product can have a lot of effects. For one, the equipment might have a price drop. You might also have planned better for the purchase, saving funds for buying the equipment over the year. However, there are times when buying the equipment is essential. For example, if your current equipment has broken down beyond repair. Another reason might also be the need to keep up with your competitors.
Running a business requires making smart decisions. Buying new equipment can be very expensive. It might be a good investment but if it does not pay for itself within a reasonable period, then it will only lose your company money. Ensure that you are making the right choice by running through the questions above before making any large financial decisions.