Ryan Hendrie
6 minutes length
Posted: 7th December 2017

Is Leasing An Effective And Productive Form Of Asset Acquisition?

Is Leasing An Effective And Productive Form Of Asset Acquisition.png

A productive asset is an asset that gives you return on investment; it’s anything like real estate rentals, land, a well-run business, and securities that increase in value instead of depreciating.

Every company wants to improve their financial performance, and improve the bottom line. That improvement in the bottom line can be reinvested in, for example, employees themselves, additional owned or leased assets, and in outsourcing services in order to continue returns, over and over. The process is cyclical in nature. But before that can happen, businesses need to assess how to calculate what assets are needed to generate returns.

How To Calculate Your Business Needs

What your business will need will depend on work rate, capacity, and seasonality – and, of course, the type of business you run. You need to understand the size of and type of workforce you need to run your business, what are the costs of those people, how many assets you need – equipment, IT, desks, machinery, anything – and the associated costs of that too. If you have assets, what’s the lifespan of the asset versus the output? How much does it cost to operate and maintain versus its income?

If you’re in the aviation industry, and you have an aeroplane, to maximize returns that plane should be used and flying as close to 160 hours per month as possible (40 hours a week, 5 days). If you only have two flights a day on that plane and they’re pond hoppers, then you might only be using the plane four hours a day instead of six to eight. You’d have to calculate all of the associated costs – the number of people needed to run the asset, overhead costs, fuel costs, airport costs, and so forth – and calculate what you get in return (ticket sales, sponsorships, any other returns). Do you break even, lose money, or make a profit when you factor in the cost of the asset itself. Planes aren’t cheap nor is their maintenance and repair cost, which is why many companies choose to lease their fleet. Those that own their planes often rent planes to flight schools part of the time, try and fly as often as possible, and lease to other companies in order to maximise that particular asset. Planes are just one example. Airlines cost money to own, run, and maintain. Every hour that isn’t generating money is losing it. A well-run business is a valuable appreciating asset, but a poorly managed one can cost you money and morale.

No matter what your business needs, you need to complete a cost analysis and see if you’re better off leasing or buying.

How To Buy The Right Assets For Your Business

Buying the right assets comes down to your cash flow, your needs, and the costs. Most items you purchase depreciate in time – cars, equipment, computers, desks, anything (except maybe land and buildings…) – and there are also running costs, operating costs, maintenance costs, repair costs, feedback, training, and support costs. Everything seems like a cost! You may find that purchasing the building where you work and the land will give you returns, but almost any other equipment or product might not. Whether you choose to buy or lease equipment really depends on how much upfront capital you have, how much return you’ll get for your investment, and if you can afford to tie up all of your capital in depreciating assets.

That’s not to say assets do not have value, but there’s always higher initial expense plus down payments. You may buy something outright (best option), but if you finance the option it’ll impact your cash flow, and borrowing now will impact your ability to borrow more capital as you have existing debts – and what if you need new equipment or additional equipment 6 months down the line? How long will you need it? Then there’s also the re-sale and depreciation factor when you no longer need it. Depending on which assets you have, there might not be much usable life, and you may have to upgrade continually to keep up with the competition. You may need to negotiate the sale of current assets to generate cash flow for any new purchases.

For a more low-tech business, you may be at an advantage leasing some form of specialised equipment when, say, there are only three of this particular machine in the country, and you possess one of them. You may not know the ins and outs of using that particular machine, but the lease agreement includes maintenance, support, and training on how to use the equipment. Those additional products could become invaluable.

The Benefits Of Leasing Assets

Leased equipment comes with tax benefits too, and it doesn’t affect your debt to asset ratio like owning depreciating assets does. However, it requires careful financial planning. You’ll need to understand and track how much you’ll spend on your contract versus the purchase price, you’ll need to analyse how long you’re leasing the asset for and when you’ll need an upgrade to see if those numbers are aligned.

Many companies choose to lease mid-ticket items that they don’t plan to invest in or that need replacing often (like computers). If you’re leasing computers, and they’ll stay up to date for around two to three years, make sure you aren’t leasing the item for more than that two to three years of usefulness – or you’ll be no better off than if you bought an asset and are waiting to sell it before you can upgrade (often at a loss). With leasing, however, you should be “paying” less for the asset in your tenure. If the asset is worth £25,000 you may be paying £23,000 to lease it but may have a payoff amount of £5,000 if you then want to buy it, but the benefit of leasing is you can get regular refreshes of equipment, there’s no upfront cost, no down payment, you may have tech expertise as part of the cost, the ability to repair or replace (without a hit to your bottom line), and have training on how to use the equipment properly. It’s all about analysing your business needs.

Be smart about leasing. Ask for the bottom line cost – and not just monthly payment. Ask about the length of the lease and any small print. Be sure you understand your agreement and the benefits of it. Be sure you understand the tax implications, benefits and disadvantages of buying versus leasing over the particular period and for the actual asset. In leasing you’ll get the equipment immediately, there’s a fixed cost for the lease period, equipment can generally be updated regularly or at any stage during the agreement by restructuring the payment scale, and you can offset all costs against your tax liability. Leasing a computer for instance, if the agreement is managed properly, should be less expensive than buying it and you do not own the asset and disposal costs afterwards; additionally, if you do not have the upfront capital and don’t want to be responsible for operating and maintenance costs, leasing may again be right for you.

The big benefit of leasing for most companies is to free up cash flow and allow the business to comfortably keep running. Then any extra capital can be invested in other areas of the business such as more employees, advertising, and other ways to generate business.

Having a mix of leasing and owning assets is the most effective and productive way to balance your assets with your cash flow.

Leasing In Changing Stay Up To Date

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