Nov 18, 2022

This Podcast Is Episode Number 498, And It's About The Solution To Your Construction Company Equipment Dilemma

Is it time for your construction business to invest in some new equipment? And if so, is it a more brilliant business decision and cost-effective to rent or buy?

Black Friday, followed by Cyber Monday, is coming. The real question is what equipment is on your business shopping list. It is all a question of your budget, income, cash flow, profit & loss, and taxes.

Why you might need new equipment:

• The right equipment can enhance your processes, productivity, innovation capacity, and bottom line, but should you buy now or wait till a later date?
• A few reasons you might need to purchase new equipment now are because:
  - You have some big contracts coming up and need to increase production.
  - Your construction business is expanding at a fast rate.
  - You need to replace some aging equipment to maintain your business’s high standards and keep up with the competition.

Evaluate your existing financial state

It can be easy to get caught up in the growth of your business without putting the necessary time into assessing whether you’re financially ready to buy some more equipment.

Try to look beyond your current situation to project your costs over the coming months or years (depending on whether you plan to hire or buy). 

You can reduce the financial impact on your business by:

• Using financing to buy the equipment – you may even get lower rates than hiring the asset, and after you complete your payments, you’ll own it.
• Purchasing quality used equipment could be more cost-effective than renting over the long term.
• Examine your business as a whole

Short-term purchases without long-term plans can be costly

Consider these questions when drawing up plans to invest in more equipment:

• What effect will the new equipment have on your human resources?
• Will you need additional staff or relocate staff elsewhere throughout your business?
• Can the equipment you’re replacing be used elsewhere in your business?

The length of the job or project

A crucial deciding factor as to whether the right time to purchase more equipment is now is the length of an upcoming project (or the frequency of extra jobs coming up).

Additional short-term work suggests hiring would be a better option. Likewise, if you need a highly specialized (and expensive) piece of equipment, it might be preferable to hire it.

It makes more sense to buy for longer-term projects. Hire costs can add up quickly as a job gets delayed and pushes past its expected finish date.

Usage and availability

Knowing that the right equipment is available to your business whenever needed is a significant advantage. If anything unexpected happens with a job, you’ll have the necessary equipment to react and reschedule.

Potential clients will also notice that you own the equipment necessary to complete their requests, helping develop trust with your business.

When you decide whether to hire or buy, consider the risk of your preferred hire company not having the equipment you want when you need it.

Deciding to hire or buy

You can get the new equipment you need by renting (hiring) or buying. Each has advantages and disadvantages, so it’s worthwhile assessing your business’s current financial situation, its current capabilities, and its plans (for growth).

Weigh up the pros

If you choose to purchase new equipment, the advantages over hiring will include the following:

Availability – you can be sure the equipment will be available when needed.

Ownership – you own the equipment and can potentially get a return on it when you sell it.

Additional financing – if using a loan to pay for your equipment, you might be able to get extra funding to cover transport, training, or installation.

If you decide to rent the equipment, the pros include the following:

Cost – smaller initial investment

Maintenance – the lender, should handle insurance and maintenance.

Technology – you can usually hire the latest equipment available and should be able to upgrade as your project progresses.

Will renting make your life easier in the short run while you consider buying at a later date? Will buying now be more beneficial to your business over the longer term?

On the accounting side:

If you buy before - the end of the year – the Internal Revenue Code – Section 179 allows for accelerated depreciation. If your purchase is less than $500.00, it is always a qualified expense.

The bigger stuff is Vehicles / Tools Mounted On A Trailer / Generator / Specialty Equipment.

Depending on type - Life span and cost basis can trigger other tax reporting rules. Section 179 accelerated depreciation has been in place for many years.

Three reasons the 179 accelerated depreciation went into effect:

1. Stimulate the local economy – some purchases, such as QuickBooks, are purchased at local stores.
2. Give the business a reason to grow and expand by adding new equipment and additional employees.
3. Useful life ended long before the depreciation schedule ended years later.

Everything comes back to two issues - Taxes and Cash Flow

• If you have the cash or can finance, do you need to buy a piece of equipment for the field?
• If you have the cash or can finance, do you need to buy a piece of equipment or software for the office?
• From an operations viewpoint - If you purchase either now, can you use it to make or save money?

It’s easy to assume that the deduction will always be available. Congress decides what changes year over year in the details of the deductions. At one point (several years ago), vehicles over a certain weight (SUVs) had a cap on the depreciation deduction. They were considered luxury vehicles, and the extra features were unnecessary over the basic pickup truck.

Summary

A wheelbarrow and a shovel are cheaper but would a small Hitachi be more productive and cost less in the long run, which could give you more money to operate and grow your construction business? 

Taking into account the points above, you’ll get a clearer idea about whether now is the right time for you to purchase more equipment, either with your capital or through financing, or whether it’s a better option to hire for the time being.

Next steps

Talk to your accountant to discuss the pros and cons of hiring and buying new equipment.

Have a word with your bank manager about whether you can get funding to purchase the equipment your business needs.

Reach out to me; I'm ready when you are.

About The Author:

Sharie DeHart, QPA, is the co-founder of Business Consulting And Accounting in Lynnwood, Washington. She is the leading expert in managing outsourced construction bookkeeping and accounting services companies and cash management accounting for small construction companies across the USA. She encourages Contractors and Construction Company Owners to stay current on their tax obligations and offers insights on managing the remaining cash flow to operate and grow their construction company sales and profits to put more money in the bank. Call 1-800-361-1770 or sharie@fasteasyaccounting.com