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How to tell whether its time to make a business investment

POSTED: 12th September 2014
IN: Personal Guides
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As a general rule, it’s often suggested that in order to save money, you should avoid splashing your cash on new things. But when running a business, it may be the case that you can actually make money by investing in items that can assist your company and help you to prosper.

 

New machinery or equipment may seem expensive, but these assets can prove to be an excellent investment that not only makes money, but also improves efficiency within the business.

Sometimes new assets can be vital in order to remain competitive, but it’s important to choose your equipment wisely and do some forward planning so you can make the most of any new additions.

Is it worth it? How to calculate ROI

Business assets can be hugely expensive and for many small businesses, devoting so much money to something that you may not have used before can seem like a great risk.

Weighing up whether or not an asset is likely to bring in money and give you a positive return on investment (ROI) can help. ROI is a calculation used by businesses to help them to decide whether or not they should make a particular investment. It’s not an exact science, but knowing how to calculate how much time you are likely to save and how much profit you could gain as a result of a new asset can offer you great insight.

Technically, you could work out the ROI by subtracting the cost of the investment from the amount that it will generate in revenue before dividing that by the cost of the investment. However, there are much easier ways of working out whether you are likely to benefit from the introduction of a new asset.

For example, if you ran a packaging manufacturing company you may be interested in buying a new machine to help to speed up the process, but first you would have to evaluate how great a return the machine would make. If the machinery reduces the amount of time it takes to make one piece of packaging by 50 per cent, then you would be able to double the amount that you produce. But with such a dramatic decrease in production time, you may find yourself ordering materials from your supplier more often.

This brings to light just how important it is to be aware of machinery down time, as inactive machines can greatly lower your return.  If for example you supplier cannot meet the increased demand that you’ll be placing on them, are you able to find an alternative so that your new assets are reaching their potential?

As every business owner or investor knows, the benefits of an investment won’t necessarily materialise straight away and so it may take time before you see a return.

Stay one step ahead

With technology changing at an often alarming rate, it can be difficult to keep up and to fund constant innovation and development, but it’s  important to research market trends to assess where the demand is within your industry.

Keeping up with the Jones’ can sometimes work in your favour, but this isn’t always the case. If a competitor has bought a new piece of equipment that is benefitting them greatly, it can be tempting to match or one-up them so not to fall behind. But while it’s good to progress alongside technological change, sometimes it may not always be necessary to buy the newest equipment available. Even when battling it out in the same market, different businesses have different requirements and you may discover that a used or refurbished piece of kit can have as great a return for you as the new model will for your rival.

Once you’ve chosen the right asset for your business, it’s time to consider funding. You may be able to pay for the asset outright, but if not, there is no need to wait until you have saved up. There are options available to spread the cost over a period of time so that you barely notice your extra outgoings each month.

More affordable assets

Hire purchase

If you’re reluctant to spend a large amount of capital on an asset in one go, hire purchase may be an ideal option for you. Rather than saving up for the asset over a long period of time, your lender will buy the asset on your behalf so that you can use it straight away.

All you need to do is put down an initial deposit and pay back the money in manageable monthly instalments. Once you’ve repaid the full amount, the asset will formally belong to you. If you’ve planned your ROI effectively, it might not be long before you start to notice an increase in your efficiency and profits.

Lease finance

If you need fast access to an asset but don’t want to commit yourself to ownership, lease finance can offer you more flexible financing. Your lender will buy and own the asset for you, letting you make use of it straight away. You’ll agree on a set period for rental, but once your lease contract ends you may be able to retain use and possession of the asset if you wish.

Alternatively, you can often choose to sell the equipment on behalf of the leasing company and will retain the vast majority of the sale proceeds yourself as a rebate on rentals.

Make some savings with capital allowance

Businesses can often use capital allowances (tax relief) to cover expenditure on certain assets.  This is applicable on a vast array of assets including machinery, vehicles and tools, providing you meet certain conditions. Following George Osborne’s 2014 Budget announcement you’ll be covered for expenditure up to £500,000 until the end of 2015 under the government’s Annual Investment Allowance (AIA).

Whether you want to improve employee efficiency with new computer software, increase the amount you manufacture with new machinery or upgrade your vehicles to minimise off-road time, you can see a return providing you research and plan effectively. To learn more about how you can fund your assets using hire purchase and lease finance, please don’t hesitate to contact us at Aldermore.

 

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