This question came in to our office from a small food-manufacturing business. This was why this client was seeking the extra value of working with a CPA. Here are the questions we asked to help them find the answer:
- What are you using now? What’s the cost of that? Is it causing a bottleneck in your customer service? Will this help to grow your business to the next level? They had been using a personal vehicle with limited capacity. This meant more time spent driving and delays in delivery.
- Is this the best use of capital at this point in your business’ life cycle? What’s the state of your other equipment? Would it be better to upgrade some of that to increase your manufacturing capacity? Their equipment was either fairly new or had recently undergone a major upgrade, so a delivery van seemed like a good choice.
- How much will this cost? Can you find a used van that will serve your needs for the immediate term, or do you want to invest in a new one that will last longer? What about leasing? For this young company, a used van was the best choice.
- How will you finance this? Will you buy a used van with cash on hand, or will you need to finance this with a bank loan? With little cash on hand, an equipment loan was the best option. They already had a good relationship with a banker and were making steady payments on another equipment loan.
- Do you have the cash flow to cover loan payments in addition to your other costs? To answer this, we ran a cash flow projection under several scenarios, including the tax benefits of a purchase. By looking at the whole picture, we determined that while cash flow would be tight, the tax savings made this an overall good choice.
Is your business facing a similar decision about equipment purchases? Give our office a call, and we’ll help you determine the best options for your situation.