Investing money back into your business is an important way to support its long-term success. To keep your business running efficiently, help your team work productively, and accommodate greater customer demand, it’s often necessary to invest in fixed assets like new facilities or facility upgrades, vehicles, or equipment.
When handled correctly, capital expenditures can support more effective operations and revenue growth. They’re an important part of your business’s overall financial plan. However, business owners often approach major outlays like these with trepidation.
This is understandable. There are many factors to consider when planning a major investment. Choosing where, when, and how much to spend can come with many uncertainties. It may feel safer to avoid major spending altogether, but being too frugal can slow your business’s growth.
Performing a careful cost-benefit analysis when budgeting capital expenditures can help your company spend more efficiently and become more profitable over time.
Budgeting for the Right Assets
Let’s consider equipment as an example. Quality equipment is important, but it often comes with a major price tag. When considering a new equipment purchase, some companies simply guess about the impact of this expense. This mistake can cause a company to misjudge the expense’s long-term value and fail to invest appropriately.
Instead, take time to model the increased revenue that is possible by increasing productivity with better equipment (or any other capital improvement).
Short-Term Impact vs. Long-Term Benefits
When considering a purchase, it can be difficult to evaluate the item’s impact based on the dollar amount alone. To better understand what an expense will mean for your business, think about this number in terms of the metrics that matter to you, like billable hours, staff wages, or units sold.
Translating a price into a company-specific value can show how long it will take to earn back this amount. This also works when planning for multiple smaller expenses – such as new computers, software, or furniture. For a series of expenses over time, many companies prefer the flexibility of a business line of credit.
Measuring capital expenditures in terms of time or productivity can also help you gauge the benefits of better equipment, more employees, or a new facility. Look at your current operations and estimate how your capital expenditure would boost the daily productivity of your team – such as by streamlining processes, improving quality of work, or increasing output. Consider the value of this daily improvement when extended over months or years, and that should help you calculate the long-term benefits of your investment.
Capital expenditures can significantly deplete your cash reserves, so it’s often wise to consider financing options.
Modeling the financial impact of a major expense over time can help when applying for a loan or line of credit. By showing why an expenditure is necessary and how it will benefit your company’s growth, you can assure your lender that your strategy is sound and your loan request is practical.
Whether you plan to buy or upgrade a facility or purchase equipment, Royal’s team can customize a lending solution to fit your plans and cash flow. To learn more and discuss your needs, connect with your local business lender today.
This information is for general informational purposes only and does not constitute tax, legal, or business advice. Business loans are subject to credit review and approval.