Margins are typically thin in a small business. You may be reluctant to buy new equipment, but there usually comes a time when this is necessary. Fortunately, you don’t have to make the decision on a whim. Carefully weigh these factors and how they may affect your business.
Replacement Cost
One heavy machinery supplier says the 50/50 rule is an important gauge of whether it’s time to replace equipment. By this measure, replacement is only necessary when the cost of repairing the machine, labor included, is more than 50 percent of the cost of getting a new machine. According to MacAllister Machinery, heavy equipment can have a lifespan of 7 to 50 years.
Asset Value and Productivity
Arguably, the replacement cost is only one factor to consider. You can also use a net present value (NPV) calculation to look in-depth at how much money you’ll gain or save over a period of several years. NPV is an accounting figure that’s arrived at taking into account the salvage value of the old machine, depreciation of the asset value, and productivity. If you want to look at it this closely, you can weigh the tax implications of the new versus the old machine.
Safety Issues
In some cases, replacement of construction and manufacturing equipment becomes necessary because it no longer meets safety standards. Even if your business technically meets present requirements, you may want to invest in safer, newer equipment to support your staff. When calculating how much replacement will cost, you may want to take into account downtime when you’re switching over. You will also have to train current employees on the new equipment so they can use it in a safe and productive manner.
Back-Office Efficiency
Office equipment also quickly gets out of date. You have some flexibility when deciding whether or not to upgrade your computer systems and other back-office technology. Ask yourself whether the money you will spend will save your staff time or help you work more efficiently.
For example, if you are consistently paid late by clients because you don’t have an efficient invoice follow-up system, you may want to invest in current software and updated procedures.
Deciding to invest in new equipment is a significant consideration. It can affect the productivity and bottom line of your business. By thinking it through carefully, you can make the choice that’s best for your operation.