In nearly all businesses there comes a time when equipment or services need to be purchased. The reason might be to replace worn or outdated machinery to maintain current levels of operation or to venture in a new direction with the goal of adding to your company’s bottom line. As one of your business’s decision-makers, you are always concerned with making purchases that make sense for your enterprise’s goals and that fit into its budget.
When making business purchases there are several metrics that can be consulted to help determine the utility and financial benefits that accompany the sale. One of the most telling is your return on investment (ROI). As defined by investopdeia.com, ROI “is a performance measure, used to evaluate the efficiency of an investment or compare the efficiency of a number of different investments.”
ROI is calculated by a simple calculation that results in a percentage or ratio. The calculation takes the gain from investment and subtracts the cost of the investment. The percentage is then determined by taking that number and dividing it by the original cost of the investment. For example, a $1000 investment that returned $1100 would yield an ROI of 10%. This is the calculation: $1100-$1000/$1000.
Now that we are on the same page regarding what ROI means, the real question emerges. How can you attempt to make business purchases that maximize your ROI? It’s an important topic, as spending your company’s funds in a manner that does not produce viable returns is certainly not in its best interests. Or yours for that matter.
There is no magic formula for ensuring that your business purchases reward you with a high return on investment. If only it was that easy. While there is no simple solution for guaranteeing a high ROI on any particular business purchase, there are some guidelines that can help point you in the right direction when considering disbursing your company’s hard-earned financial resources.
ROI and Capital Equipment Purchases
Many of the purchasing decisions you need to make when running a business revolve around equipment that your company requires to maintain its current operations. It may also involve equipment that is designed to make your company more competitive or to address a new market segment. Some examples are a factory that is buying new manufacturing machinery to increase production capabilities or a restaurant that is interested in food trailers or truck builders to branch out into the mobile market in its quest for new customers.
In all of these cases, the balance between the cost of the equipment and the ROI can play a critical part in how the final decisions are made. The two basic components that you need to consider are the revenue that your purchase will generate for your business and the cost incurred to procure the equipment.
Estimating your expenses is a critical component of your purchase decision and cannot be made simply on the list price of the equipment in question. According to canadaone.com, these are some factors to keep in mind when calculating your expenses in addition to the base price:
Shipping and taxes – Business equipment comes in a variety of shapes and sizes and can be obtained from either domestic or overseas manufacturers. Shipping, taxes, and dues for overseas purchases can add substantially to the cost of your equipment.
Installation and training costs – If you are introducing new equipment to your enterprise there is a good chance that there will be training involved in order to use it properly. These costs, as well as those involved with installing your equipment, need to be rolled into your expenses.
Operational considerations – Your labor costs can change with the addition of new machinery or procedures and may increase. There is also the expense of supplies and operating costs such as energy consumption to estimate.
Maintenance – The cost of maintaining your new equipment can add a substantial amount to your expenses and can often be overlooked when making your estimation.
Debt servicing – Unless you are making a cash purchase there may be debt servicing expenses that need to be included when calculating the overall cost of your equipment.
After considering all of these factors you can begin to get a true estimation of your expenses. This estimation is often easier to make than the one that calculates the revenue that will be generated by this purchase. Careful research needs to be conducted to ascertain a realistic estimate of future revenue. This is especially true if the equipment is not simply replacing a worn component with a similar one.
Tips for Making Smart Equipment Purchases
Your purchasing decisions can have a tremendous positive or negative impact on your company. According to www.bdc.ca, here are some tips that can help you make good choices:
Evaluate your business objectives – Will an equipment purchase help resolve issues that your business is currently facing? Can it help you be more competitive or increase production? Answering these questions honestly is vital to making a good purchasing decision.
Strive for innovation – Innovation is a key component to creating and maintaining a competitive advantage in your market. When considering business purchases you should search for opportunities where your business can use new equipment to appeal to a new market segment or improve issues that current customers may have experienced with your product.
Employ an external consultant – When making large purchases you may want to enlist an external consultant to assist with a cost-benefit analysis. An objective viewpoint can shed light on factors that you may not have considered.
Research alternate suppliers – The Internet has opened many new avenues from which to obtain business equipment. When choosing your supplier, consider price along with service and the reputation of the manufacturer.
Consider financing options – In some cases, renting or leasing equipment may make more sense for your business needs that an outright purchase.
It can be challenging to consistently make high ROI business purchases. Hopefully, we have helped you get started on the right foot as you determine what purchases to make to grow your business.
About Carson Derrow
