A majority of American businesses today are using lease financing. Most corporate finance executives have already displayed their familiarity with lease financing as around 50 percent of all new equipment purchases are done through this route. With the economy on the rebound, many companies are finding out that there may not be sufficient cash to fund outright equipment purchase and hence the need to consider financing options. Given the huge state of flux in the economic environment it cannot be assumed that the people who matter know about how to make strategic use of financing equipment to enhance capital productivity and financial performance. To enable a superior level of performance by the business, it is necessary to more fully comprehend the finer points of lease finance and options, including management of assets, taxation, asset maintenance, insurance, etc.
What We Can Learn From the Equipment Leasing Industry
For more than four decades the leasing industry has been attempting to ensure the maximum business productivity by employing strategies and managing assets. Valuable lessons can be learnt from them by companies undertaking a large amount of equipment leasing to establish how assets can be managed better. Asset management essentially means planning, acquiring, managing, and recycling assets in a manner that is systematic and should be employed throughout the lifecycle of the asset starting from its delivery to its final disposition. While most companies at the moment do not have formal programs for asset management, the tangible benefits are expected to encourage large and medium-size businesses to adopt such programs and the leasing companies will be increasingly asked to assist them to shorten their learning curve by sharing their experiences.
Financial Objectives First
A careful evaluation of the financial goals is perhaps the foremost objective of an asset management program. The goals could be cash flow improvement or achieving a specified return on assets. It is also important to establish guidelines for equipment acquisition based on the need for equipment besides financial objectives. These goals, while being different for every business, should be taken into account for performance evaluation of the business unit or division
Apart from the basic cost of the equipment, businesses should also take into account how much it costs to operate, maintain and insure it. This sort of analysis is especially helpful for equipment that is used heavily to make decisions regarding cost-effectiveness to ensure that you can avoid investments that are financially unsound. Further, determination of the amount of growth in the next one to three years would enable you to decide on a proper mix of acquisition methods that can vary between leasing, renting, and outright ownership. Since the growth rate of most businesses constantly vary it can be extremely important to have the flexibility of changing the asset mix as well as the ability to get rid of equipment that is no longer required during slower times. The extent of flexibility required by a business needs to be established so that it can make a sound decision for purchasing assets with cash or through finance.
Factors Impacting Meaningful Asset Acquisition
Lease finance permits businesses to make use of the equipment for a pre-determined period. Since the needs of the business tend to fluctuate it is important for business owners to decide the kind of equipment required and its quantity. The duty cycles as well as the probability of equipment obsolescence should also be determined so that a meaningful guideline for acquisitions in the future can be established. It is vital that the period of the use of the equipment is determined so businesses can finance the asset for the same duration. This means that the equipment will not bleed cash by lying idle or with a decline in its productivity. A plan for timely disposal of the asset also needs to be set in place.
Author bio: Sandra Lee is a senior manager in an oil exploration company looking after acquisition of pipe laying equipment. A prolific writer in the online media, many of her articles on strategic finance can be read on http://leasequit.com/.