AmeriQuest’s Patrick Gaskins outlines the steps needed for a successful asset purchase, including identifying your need, identifying the best solutions and deciding what solution will give maximum value for the asset.
For businesses needing to make investments in new assets, a flexible long-term planned approach will help ensure that the best, most cost-effective decisions are made every time.
The first step in any financial plan covering asset purchases is to determine why you need the asset. There are a number of reason companies cite such as to increase productivity, to replace an existing asset that is at the end of its lifecycle, to expand existing capabilities or simply to grow the business.
The next step is to determine which asset will help you accomplish your goals most effectively and efficiently. But be advised: the asset that might be best may not give you the best return-on-your-investment.
This is why you need to undertake an ROI analysis for each option you are considering and that means finding out what the new asset will add to the bottom line. You are looking for the right combination of cost and efficiency.
Once you have identified your need, identified the best solutions to meet that need and decided on the solution that is going to give you maximum value for your investment, you’re ready to determine how you’re going to pay for that asset.
Businesses have a variety of financing sources to tap, including equity in the business, line of credit, outside investors and stock and bond issuance.
Normally a company will ask each department to submit a budget request for the upcoming year, outlining what its purchase requirements will be and the anticipated ROI for these investments. Ultimately, it will be up to executive management and the finance department to decide which purchases will be funded. So it’s essential to build a compelling case for a request and tie it to a solid ROI calculation.
Consider this scenario:
You own a bakery and have machines that produce 1,000 loaves of bread an hour. A new machine enters the market that can produce 2,000 loaves an hour. You decide you want to replace your old machines with the new models so you can be more productive.
Not so fast. If you replace all your machines at once, chances are you’ll run out of money and be unable to make additional capital expenditures for a long period of time.
What happens if two years after you purchase the machine with the 2,000-loaf capability, an even more productive machine is designed and you do not have access to capital required to upgrade? There goes your productivity gain and your competition may take your market share.
A smarter approach is to purchase a few new machines as the improved models become available and then continue to replace older, less productive assets with newer ones as they are released into the market. This way you will be growing productivity incrementally over time.
Finance officers need to be making very strategic year-over-year investments in the business to produce consistent year-over-year gains in both productivity and income.
But planning cannot take place in a vacuum. You need to project out over a five year period to determine what your needs will be and then plan for the orderly acquisition and disposition of assets.
It’s not that five is a magical number, but rather five years is a reasonable and realistic period for planning.
Part of your five-year view should include an assessment of the political climate, general economic trends, as well as any legislation or regulations that could impact your business.
The trucking industry is currently faced with having to install electronic logging devices (ELD) on all commercial vehicles. Savvy fleets have already made some initial investments in these units to see how they work and to determine their impact on productivity.
These fleets also have a plan in place to pay for these devices, which will be required by the end of 2017. Industry experts expect productivity to decline as Hours of Service (HOS) become more closely monitored and they fully expect some smaller fleets to fail due to their inability to comply with the new regulations.
The goal with all your asset purchases — regardless of the reason for the purchase — is to capture the best return on your investment in terms of both money and productivity. You can achieve your goals when you pay attention to market conditions, the economy and the political and legislative conditions that are likely to impact your business over a five year period.
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