Four Ways to Get the Most from Your Equipment Investment

By Mike Vorster, President, C.E.M.P. Central Inc. and David H. Burrows Professor of Construction Engineering and Management Emeritus, Virginia Tech

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As the peak construction season winds down, many contractors will be assessing their fleets and considering new machines. It’s a good time to examine your financing strategies as well. Here are four recommendations that can help protect your equipment investments.

  1. MIX IT UP. If the economic downturn in 2008 taught us one thing, it’s the strong case for business diversity. From your customer base to your equipment acquisition strategies, it’s unwise to put all your eggs in one basket. Owning everything in your fleet is a recipe for disaster. You need flexibility and access to working capital to cope with business fluctuations, and that means taking a diversified approach, with some equipment owned outright, some financed via credit or lease, and some rented.
  2. THINK ACCESS, NOT ACQUISITION. We used to talk about “buying” equipment. That phrase was replaced by “acquisition” to suggest the broad range of financing options beyond spending cash. The trouble is, both “buy” and “acquire” suggest owned assets. And depending on your business model and your market, ownership might not be the best approach. “Access” is an even broader concept. You can access equipment by using units in your own fleet, by signing lease and right of use agreements, and by renting machines by the day or week. The concept of access creates a different mindset, reminding you of the diverse ways you can bring additional equipment capabilities into your business.  
  3. CONSIDER RISK FIRST. Many contractors still place too much emphasis on cost when making buy-borrow-lease-rent decisions. Risk is even more important. It’s similar to constructing a sound savings portfolio. The smart move is to go for a mix of investment media—from stocks and bonds to cash and maybe even precious metals—all with different risk and return numbers. Portfolio theory minimizes risks and while it might ding your returns compared with a highly aggressive, non-diversified approach, you are less likely to lose your shirt. The same holds true for equipment investing. You want to analyze the risks associated with each approach relative to your business, and make decisions based on minimizing investment risk rather than getting hung up on small cost differences. 
  4. FIND YOUR SWEET SPOT. When considering financial alternatives, you’re working in a framework defined by debt-equity ratios on one side and working capital ratios on the other. Ask yourself tough questions. If you are borrowing money or leasing machines, what is the cost of the commercial finance and what will be the effect on your debt-equity ratio? If you buy outright, what is the opportunity cost of the equity and how does that affect your working capital? There are no perfect answers. If you borrow all the time you’ll end up working for someone else. If you only use your own money, you’ll end up with a big fleet and no cash. Aim for a mixed strategy that offers flexibility, a good return, and minimal risk.

Your investment in your equipment is critical to your business. Learn more by attending our education session, Buy, Borrow, Lease or Rent: It’s a Matter of Risk, Not Cost at CONEXPO-CON/AGG in March 2017.

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