Businesses of any size inevitably deal with acquiring new equipment or assets to help them provide better products or services. Whether it’s something such as a vehicle for attending meetings or a larger piece of machinery for a factory, asset acquisition can be one of the most crucial decisions to be made in a business lifecycle.
But, unfortunately, businesses are often in such a hurry to make the purchase that the relevant due diligence is not undertaken. Rather than being reactive to perceived needs, buying new equipment or assets should be a highly considered process.
Ignoring crucial steps in the asset acquisition process could be catastrophic, so be sure to consider the following questions when preparing to make a purchase.
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Do you have a cashflow forecast in place?
Sophie Andrews, director of Sydney-based bookkeeping agency The Accounts Studio, says business owners can make the mistake of purchasing an asset without having a cashflow forecast in place. She warns that, without a forecast, businesses can be in the dark about whether an asset will provide a benefit to the company’s bottom line.
Not only that, being unaware of any cashflow shortages means you could be oblivious to one of the most important warning signals that your business is at risk of collapse.
“You need to be on top of your accounts. It obviously depends on the type of asset you’re going to purchase, but you need to consider whether you can buy it from the point of view of your profit margin.”
In addition, the rationale for purchasing the asset needs to be made clear: “Quite often we see businesses trying to acquire assets in order to reduce their tax bill. There’s a mentality that the money needs to be spent on simply ‘anything’ before the end of the financial year.”
And while the government offers small to medium businesses some tax incentives , she goes on to say this is not always the best strategy – the tax bill might be reduced, but the asset still needs to be purchased in order to produce new business.
Will the asset generate an income?
Andrews says that, in an ideal world, a business would have worked out what their break-even point is on the asset – something that involves due diligence.
The business must first anticipate how much the asset will cost on an ongoing basis (this could be repairs or servicing for example), and then match those costs against the purchase price.
This can be tricky, but there are tools available to help manage this process. And in any case, Andrews says, it needn’t be a completely accurate plan. A conservative estimate of monthly, quarterly and yearly costs will help determine a break-even point.
The important part is to ensure the break-even point is plotted on the business’s forecast. If it’s too far in the future, the acquisition of the asset might not make financial sense.
Can the business operate without the purchase?
Business strategy expert Tom McKaskill highlights necessity as another important aspect to consider before asset acquisition.
“The value that you acquire may have very little to do with the cost of the asset,” says McKaskill. “For instance, if you’re a business operating out of a vehicle and a spark plug goes out, the cost of that plug is little, but the value to the business is enormous.”
Ask yourself: do you have to have the asset or equipment? Is it a matter of being nice to have, or that you need it? Perhaps it’s something that will keep your company fresh and drive innovation. If you do need it, also pose the question: what’s the impact of not having it, or delaying it?
McKaskill recommends determining if there is an alternative solution to acquiring the asset that would produce the same result. Is that alternative solution satisfactory? It’s all very well opting for a cheaper alternative, but that’s not much use to you if it isn’t as effective.
What problem are you trying to solve with the purchase?
Being able to determine whether the business requires an asset demands a deep understanding of your strategy as a whole, says McKaskill. If that isn’t in place then assets can be acquired for no purpose or benefit to the business – essentially wasting time and money.
“You need to consider carefully which criteria you are using [to make strategic decisions], and for that to happen, you need to understand the problem you’re trying to solve… Subsequently you should set up attributes to solve that problem – and then use a test to decide which assets would best solve it. [Look for] the assets with the least amount of hassle, the least amount of learning required and the longest lifecycle.”
How will you finance your acquisition?
Financing asset acquisitions can be done through various approaches and Andrews explains businesses need a clear strategy to present to their bank, which is why it is essential you know your business’s financial operating figures.
“We deal with a client that buys a lot of equipment, which they then hire out – so they shop around on the financing side and they’ve found that with bigger purchases, they can get finance for the GST portion of that equipment.
“You need to be aware of all the financing and leasing options you have available. And to do that, you need a clear cashflow forecast – be sure to have that in place.”