As a Green Industry business, acquiring assets is an essential part of your operations. However, before making a significant investment in purchasing new equipment or vehicles, it’s crucial to evaluate the financial implications and consider various factors. Below we’ll explore ten important questions that you should ask yourself before purchasing an asset for your landscaping business. By carefully considering these questions, you can make informed decisions that align with your business goals and financial well-being.
Is it worth renting instead?
Renting equipment can be a cost-effective alternative, especially if you require certain assets for occasional or seasonal tasks. Evaluate the frequency of use and compare the rental costs with the potential ownership expenses to determine whether renting is a more financially viable option for your business. For example, if you only plan to utilize the asset less than 30% of the time, it may be worth renting.
What is your reserve capital level?
Maintaining a healthy reserve capital level is crucial for any business. Before purchasing an asset, assess how it will affect your current reserve capital. Ensure that your cash reserve remains at a level that can cover at least two times your monthly operating expenses. This provides a safety net and safeguards your business against unexpected financial challenges.
What is your current asset utilization and expected utilization?
Evaluate how efficiently your current assets are being utilized. Consider the hours of operation, downtime, and overall productivity of your existing equipment. Additionally, estimate the expected utilization of the new asset. Analyzing this data will help you determine if purchasing the asset is justified and if it aligns with your business needs.
What is your current return on assets and expected return?
Assess the return on assets (ROA) for your landscaping business. Calculate the ratio by dividing your net income by your total assets. Understanding your current ROA will provide insights into the profitability of your assets. Additionally, estimate the expected return on the new asset to determine its potential impact on your overall business performance. A great goal for a green Industry business is for ROA to be above 25%.
Are there any assets that you can sell?
Before purchasing a new asset, evaluate your current inventory of equipment and vehicles. Identify any underutilized or redundant assets that you can sell. Selling unnecessary assets can generate additional capital and potentially reduce the financial burden of purchasing a new asset.
What is the potential resale value?
Consider the potential resale value of the asset you intend to purchase. Research market trends and consult industry experts to estimate the future value of the asset. This knowledge will help you make an informed decision and factor in the potential return on investment when it comes time to sell or upgrade the asset.
How does additional depreciation expense affect profitability?
Understand the impact of additional depreciation expense on your profitability. Depreciation is a non-cash expense that reduces your taxable income but can affect your net profit. Depreciation can be as much as 4% of total income!
What is the current debt-to-equity ratio?
Evaluate your current debt-to-equity ratio, which measures the proportion of debt and equity financing in your business. Purchasing an asset using debt financing increases your debt burden. Your goal for this ratio is to be under 1.0.
What are the potential direct labor hours saved by this purchase?
Consider the potential direct labor hours that can be saved by investing in the new asset. Determine how the asset can streamline your operations, increase productivity, or reduce manual labor requirements. By quantifying the labor savings, you can assess the long-term cost-benefit analysis and understand the asset’s potential impact on your workforce efficiency.
Is it better to lease instead?
Leasing an asset offers certain advantages that may be beneficial to your landscaping business. Leases often have lower upfront costs, allowing you to conserve your working capital for other business needs. Additionally, lease payments are typically tax-deductible, providing potential tax benefits. Leasing also offers flexibility in terms of upgrading to newer equipment or adjusting to changes in your business’s needs.