Drive Your Business Forward With Effective Lease Management
If you are considering developing more financial flexibility for the company, whilst reducing the risks related to liabilities or the amount of capital tied up in owned assets, it’s likely that you are exploring leasing.
If so, it’s important you have adequate procedures and processes in place for managing your company’s leases, but before these are put into place, you may want to start with a run-through of just how you can drive your business forward with effective lease management.
At the end of this blog post is a downloadable document which gives you all of the basics to managing leases - in The Ultimate Guide to Leasing - but the post itself will aim to highlight the operational and cost savings that can be achieved through effective lease portfolio management.
Why Leasing Is Becoming More Popular
In part, the rise in popularity of leasing has been a response to more testing economic circumstances since credit became more expensive after the 2008 crash.
But it is also an effective way of keeping capital more fluid and accessible, as a lessee (the company using the asset) gets the benefits of using their desired assets without the responsibility of purchasing, replacing and (to an extent) maintaining the assets. Whilst, in some cases, for argument’s sake, the monthly lease payment may be similar to a loan repayment for purchasing the item, the end of the lease agreement will usually see the item returned to the lessor and a newer, more efficient item can be leased instead.
This negates the costs and responsibilities of upgrading or selling the leased items entirely. Saving both management time and reducing financial risk. As a result, assets used by the business to function are now increasingly being seen as an operational cost, thanks in part to the extra fluidity offered by a growing lease industry (as more lessors and lessees make agreements more competitive and financially beneficial), rather than a liability.
Put another way, it’s like a shopkeeper or pub landlord keeping their stocked items to a minimum in order to minimise risk and improve cash flow. Except that, instead of avoiding “having too much capital tied up in stock”, businesses are avoiding being crippled by a large fleet of owned machinery or vehicles (for example) and all the costs associated with maintaining or offloading them, by leasing them instead.
Obviously, this isn’t a new practice, but it has grown in popularity in more recent times, particularly as Millennials become the dominant demographic. The attitude of the Millennial generation, also known as Generation-Y, is a lot more focused on having access to the best (read ‘new’) things and paying to use them when needed rather than saving to purchase them and treating them as an investment. Short term commitments are favoured.
And at a personal level too; the house rental and car leasing industry have seen massive growth as previously aspirational homes and cars are now regularly being leased for monthly payments similar or much less than the repayment of a respective mortgage or Hire Purchase deal. But there is no need to find a hefty deposit or money for a balloon payment at the end of the car finance deal - not to mention the servicing and warranty extension costs involved with running a property or car that you own.
Then if a person’s circumstances change, they can simply end the lease agreement or wait for it to expire in the near future (thanks to the short-term agreement in place) and walk away. And this is instead of being lumbered with an expensive second-hand Mercedes Benz, which many fellow Millennials will be less inclined to purchase once it is viewed as out of date and second rate compared to the latest, shiny, more efficient new model - which is available at the same or lower monthly cost.
All of this illustrates the reason that more and more companies are turning to building up a large lease portfolio in order to minimise the risk of ownership when it comes to everything the business uses to function: from office furniture to a couple of delivery vans at one end of the scale, to jumbo jets, rail freight and large-scale truck haulage at the other.
The Main Principles Of Effective Lease Management
But lessors do not operate such a successful industry in order to please Millennials and allow them to access otherwise unachievable items. There is of course money to be made.
What a lessor is hoping is that lease agreements will not be renegotiated at any point and will simply be renewed, so that potential cost savings (for the lessee) are not achieved and an asset whilst depreciating in value is still achieving prime rental rates (for the lessor).
Additionally, as the asset remains the property of the lessor and not the lessee, who is purely paying for the right to use it, any damages, invalidating of warranties or anything else, which will impact the resale value of the asset, can be recovered by the lessor at the expense of the lessee who may feel penalised heavily. That is probably any Baby-Boomer generation’s advice to their Millennial child looking to lease an expensive list price car – look beyond the monthly payments to what conditions prevail at lease end!.
It keenly illustrates the need for effective lease management.
The more lease agreements the business takes on, the greater the potential flexibility in cash flow, the shorter and smaller the commitment to assets which the business needs in order to run, but the more management is needed. The principles of effective management of the lease portfolio include:
- Making sure agreement terms and conditions are not too in favour of the lessor.
- The risk of the lease agreement is manageable.
- No leases are left to automatically renew or incur extra charges.
- Impending accountancy changes, brought about by IFRS 16, are complied with.
- The leased assets are actually optimising the business.
- The agreements formed are cost effective and as beneficial as possible.
“This reduces the amount of time it takes to assess the lease portfolio and tailor how you review your agreements effortlessly.”
Why Proper Lease Portfolio Management Helps Your Business
When all of this is done effectively, the management time involved is kept to a minimum. Especially when compared to if a colleague, or yourself, have to spend the time negotiating the business out of unfavourable agreements. And this, of course, also takes the employee away from working on other roles and responsibilities.
By keeping an effective hold on lease portfolio management, all of the benefits of leasing can be harnessed and utilised, as opposed to firefighting the negative possibilities.
Besides impacting the bottom line, it’s important to get your lease management principles well in place before 1st December 2019, because this is the date that IFRS 16 will mean that pretty much all lease agreements (including operating leases) will have to appear on balance sheets as standard practice. This will mean that all and especially poor-value lease agreements will impact the representation of the business and will not be squirrelled away as a note to the accounts whilst they are being improved or resolved.
Get More Knowledge: The Ultimate Guide To Leasing
If you are interested in getting more of a grasp of what leasing is, what the benefits and potential risks are for your business, what exactly different types of leases are and much more; you should check out our “Ultimate Guide To Leasing”.