Running a business effectively can be challenging. Businesses are under pressure to ensure that investments and resource allocation put in place yield profitable results. Now more than ever, to compete and remain ahead of the curve, organisations need to be innovative and find areas where they can cut down costs to increase growth and profitability.
Achieving this goal will require addressing certain areas within a business where costs can be controlled. Each company will have its own set of expenses depending on the specific business needs of a particular sector, however, there are areas such as marketing, IT or operations where costs can be lowered significantly.
Let’s take IT budgets for instance, with the global economy undergoing a digital transformation, keeping up with the pace of technology is now a requirement not an option. Technology is changing the way all businesses compete for and serve their customers. However, updating current technologies as industries evolve can be financially challenging for most businesses, but this doesn’t need to be the case.
According to DJ Kumbula, a Chartered Accountant and CEO at InnoVent Rental and Asset Management Solutions, “there are three main options used when it comes to acquiring new technology; outright cash purchase, a bank loan or a pay-for-use model, with the two most commonly used being cash and a loan”.
Kumbula advises that all businesses need to take the first step of exploring the different choices that are available. “Cash might still be the first option businesses opt for, because no one wants to deal with loan repayments that come with interest. At a glance, this is an attractive reason, however, owning technology outright does not eliminate the costs associated with maintaining and updating it,” he says.
“With time, technology assets depreciate in value and use, the benefits of a cash purchase are soon overshadowed with the hassles of storing and disposing the old assets. Outright cash purchases are only beneficial if the assets acquired are appreciating assets. The opportunity cost of capital is lost when you invest in depreciating assets.”
The second option is a bank loan. “A loan can be a good way to finance business equipment purchases. However, it is not without its disadvantages. The interest, and the residual and balloon payments that are often tied to a loan mean you end up paying a lot more for the equipment than it’s worth and, seeing as most equipment depreciates, this doesn’t sound like an appealing option. You also end up with the same ownership costs and hassles as outright cash purchases,” Kumbula adds.
“An underrated option that’s often overlooked is the pay-for-use model which is far more attractive as it helps businesses cut down their costs. A pay-for-use model in procurement terms operates as a lease and allows you to use the equipment during its useful lifespan with the option to return the equipment when it is no longer working at its optimal potential or when you want to buy new equipment. This option is cheaper than both an outright cash purchase and a loan.
With affordable predetermined repayments and no upfront payment required, this option frees up cash resources to investigate new business opportunities for growth. By leasing technology, a business can avoid the huge capital expenditure and the interest fees associated with bank loans and keep costs to a minimum,” Kumbula continues.
The bottom line he says, is that you need to understand how your organisation will be impacted when you finance equipment. “Before choosing any of these options, prepare a cash flow forecast to get a full understanding of how each financing option will affect the running of the business. Some options will yield short term benefits but will cost more in the long run and others offer sound opportunities to put working capital to better use. It is also recommended to run a rent vs buy financial model to scientifically evaluate which one is superior and remove subjectiveness or personal bias.”