10 questions to answer before your equipment purchase
Read time: 4 minutes
Equipment purchasing procedures will vary from company to company. However, no matter the size of your organization, it’s important that the following 10 questions are answered before your equipment purchase.
1. Has a cost-benefit analysis been completed to justify the purchase?
The first thing you will need to do is identify your needs and set your goals. Ask yourself how the equipment purchase will fit with your future growth and production targets? Hiring a consultant to help you at this stage may be a worthwhile investment.
2. Do you need new equipment or is used equipment appropriate for your needs?
Compare used equipment with new models. Will older equipment suit your needs? Do you need the latest features for your operations? Second-hand equipment could be the right choice for your business. But make sure the manufacturer’s support, spare parts and accessories are still available.
Refurbished or remanufactured equipment could also be a good alternative, particularly if your business is just getting started or you are looking to expand. Not only is the cost lower than for new equipment, but warranty and customer support is often included.
3. Are funds available or will you have to finance the purchase?
Using working capital to purchase equipment could put you at risk of a cash crunch in the event of a slowdown. You could also miss out on business opportunities because your money is tied up in assets. External equipment financing frees up cash flow for day-to-day expenses and you can pay down the debt when your business has surplus cash.
4. Do you need to purchase this or would it be more cost-effective to lease or rent?
Leasing can often result in lower payments. However, you do not own the equipment and you may not be able to purchase it until the end of the contract. In the long run, this option may cost you more.
Renting may be appropriate for equipment that quickly becomes obsolete or is needed for a specific project. Rented equipment is also a good choice if you might have to quickly exchange or return it for a minimal cost.
5. What is the payback period and is it reasonable?
The payback period is the amount of time it will take for the cash inflows generated by the equipment to repay its purchase price. This is a common measure of the risk associated with the investment.
Generally speaking, purchasing equipment with a shorter payback period will be less risky. However, other factors such as the lifespan of the equipment, cash flow, profitability, maintenance costs and the effect of the equipment purchase on your company’s production process are not accounted for in this calculation.
6. What is the most appropriate and cost-effective source of funding?
Different financial institutions will offer you different financing proposals. Shop around to find the best financing solutions to meet your needs, but don’t focus only on interest rates. The percentage of your purchase different institutions will finance, the repayment schedule and the collateral you are willing to offer are all important factors to consider when selecting a source of funding.
7. Is your project realistic?
Your banker will want to see the quality of your sales and strategic plan, and the projected increases in productivity and gross margins resulting from the new equipment.
From an operations standpoint, you will have to demonstrate the benefits for the company, the increase in productivity, the cost savings, how the new equipment fits in the production line and what adjustments will be required in your production process.
From a cash flow standpoint, your banker will want to know that your company can afford the equipment. He or she will also want to know why you are producing in-house rather than outsourcing production.
8. Are you purchasing from the best vendor?
Don’t limit your search of vendors to the people you know. The Internet gives you access to a wide range of specialized equipment companies, so take the time to browse. Trade shows are also a great opportunity to get some hands-on time with equipment.
Factors beyond price should also be considered in your supplier decision. Post-sales service and a supplier's reputation are important factors, and always get references. If you're a loyal customer, you can ask for better warranties or an extended customer service plan.
9. Does this equipment meet safety standards?
It's crucial that your equipment meets safety standards. The way of ensuring that your equipment meets them is to have it checked by a qualified technician.
The Canadian Centre for Occupational Health and Safety is a great resource to consult on work safety. It offers courses and information on workplace hazards and safety requirements, as well as provincial, territorial and federal safety legislation.
10. Does the equipment come with a purchase order?
A purchase order includes the specifications to make sure the equipment does the job. It also defines special installation requirements such as power supply and floor support, as well as the associated cost.