What should you think about before purchasing new machinery?
For most businesses, even those turning over millions of pounds per year, purchasing new machinery is a large financial decision that should not be made lightly and without full consideration of a number of factors.
Capital expenditure whether it be spending hundreds of thousands of pounds on a new piece of equipment or just a few thousand, is still relevant to the size and performance of the business and could have a financial burden or could dramatically alter the financial situation of your business if purchased without care and consideration Such as:-
- how much the new machine or equipment will be used
- what extra output and capacity it will create
- can the repayments be
In this guide we look at some of the key factors that should be considered before purchasing new equipment.
If a company is very cash-rich, they may choose to buy machinery or equipment outright so that they have full ownership from the outset and can keep the equipment for as long as they choose. However, due to cash flow constraints, buying equipment outright is not a viable option for most companies. Even if a company has the liquidity available, buying machinery outright may impact their cash flow so significantly that they have to curtail investments in other areas of the business, which can slow growth. Today there are many finance options available for a company that wants to invest in new equipment, including bank loans and asset finance. For more information on asset finance, you can visit our Guide to Asset Finance and Advantages of Asset Finance.
You are able to claim ‘Annual Investment Allowances’ on capital expenditure on new items of plant or machinery.
Capital allowances refer to a sum of money that can be deducted from the amount of tax a business needs to pay. These allowances are also available when you purchase vehicles, machinery or equipment through asset finance. These allowances are often changed in each financial tax year, so it is always important to monitor timing of any significant purchase in order to get the best allowance for your business.
If you purchase an asset through hire purchase, you can claim back the VAT, and there are further capital allowances available. If you purchase an asset through leasing finance, you can reclaim the monthly VAT payments on your vat return, and offset the rental charge against your taxable profits. It is advisable to discuss this with your accountant or financial advisor before committing to any new purchase.
Growth Plans & Usage
Another important area to consider is how the new machinery will fit in with your business’s growth plans – do you already have enough work to ensure the new machinery will be used on a regular basis, or have you made a plan to bring in enough work over the coming months and years to ensure the machinery/equipment is utilised enough to justify the purchase? External economic factors might impact on the demand for your services, but outside of that, it is very important that you ensure the purchase will improve the performance of the company and generate increased output to cover the additional financial output the purchase will cause.
Just like buying a car, the running costs of plant equipment can significantly impact the overall cost of the equipment over its lifetime. Before making a purchase, consideration should be given to the running costs to:-
- a) the machinery you have already, if applicable and
- b) similar machinery that is available in the market.
Aspects to consider include fuel costs, maintenance and repair costs, manpower and any increased output from the new machinery such as delivering goods, servicing orders etc.
“It is often said a vehicle that is a few years old will do the same job and achieve the same income as that of a brand new vehicle which costs considerably more.”
If the equipment is only required for a short term contract, will it achieve a good residual value at the end. Will the repayment terms be achievable for the same period.
Factors should include:-
- Time from order to delivery and installation of the goods
- When do you need the additional equipment from
- How long do you plan on keeping it for
- What life expectancy the equipment will have.