Asset Purchase Rationale

This article has been written as training content for staff of SXS to understand the rationale that goes into what equipment or other resources to invest in.

Capability

In order to justify investing in any assets we need to know that we have people who can use it, or can swiftly learn to use it, to its full potential.  While one cannot learn an item fully before having access to it, it is possible to:

• Arrange a demo of the item
• Arrange a visit to the suppliers premises for training on the item
• Arrange a free loan of the item to use at events
• Hire the item to use it at an event
• Read the manual
• Watch any Youtube tutoirals
• Do wide reading on the technical principles and techniques around the asset

Capability is not just the ability to use the item, but also the ability to keep it in very good condition, make repairs and manage parts.

This must be demonstrated, or a plan put in place to build these capabilities before we will seriously consider the purchase.

Alternatives

Before any purchasing decision is made we need to know that all alternatives have been considered.  By alternative I mean an item that fulfils the same purpose. So you must know the answers to the following:

• What else does the same job?
• What are other companies using?
• What are other industries using (where applicable)?
• What is the cheaper alternative?
• What is the more expensive alternative?
• What are the competing products with the one we are considering investing in?
• What is the availability and cost of hiring the item instead of buying it?
• How might we  be able to approach our work slightly differently in order to not need the item while still delivery the same quality?
  

Need and Benefit

Need and benefit are probably the most important considerations when looking at future investment.  Even if other factors do not allow for the purchase right away, having need and benefit will put the purchase as a priority for the future.

Need means that we cannot continue to do the work we do without the item.

Benefit means that the assets allows us to do a better job for our client, save money, save time, or make people’s lives easier by having the item.

Affordability

Can we afford the investment? Affordability is defined by liquidity which loosely equates to 'cash in the bank'.  It is not an option to put our finances under strain to buy assets as this can disrupt the smooth running of our normal trading.

Many companies in various industries use debt as a way to purchase assets. This can make a lot of sense in some circumstances and for certain types of assets.  As a mature business we do not use debt as a way of purchasing equipment – we stick to the mantra of “you can’t afford it, you shouldnt buy it”.  We do, however, use debt as a way of purchasing property as this is an asset that will last indefinitely and is not affordable from working capital.

Payback and Return

These are financial concepts.  Simply put, 'Payback' means how quickly we make our money back.  This relates to the additional fees we see for the new item that we would not have otherwise got that add up to the total purchase cost.  This is important as it may form part of being able to get clients to spend more money with us as they see a benefit to the item and therefore allocate more budget to us. 'Return' relates to what percentage of the purchase cost we see back per usage.  Some items may see 100% return on their first job, whereas other may see as little as 2%, which means they need to be used at least fifty times to pay for themselves.

A balance of both of the above is important.  Of course it is sometimes hard to know how much an item will be used.  In this case we will look at past needs, what is currently booked in the future and what we feel might be needed in the future.

Sometimes there is a'no brainer' situation where a long string of confirmed work means that the asset is fully paid for at point of purchase – we like these situations and incentivise clients to make block bookings to allow this to happen.

In some rare cases we might buy items for strategic purposes where the items do not have a good payback or return.  In these cases we are buying to give an overall better performance of our work or to allow us to do new work altogether.

Opportunity cost

'Opportunity Cost' is the idea that if we do one thing we cannot do another. On a personal level this might mean 'If I go to Spain with my partner I cannot buy the new computer I want'. In the case of asset purchases we need to look at what buying the proposed asset prevents us from doing. For example we may be looking at buying a new piece of equipment which prevents us from buying two new vans – in this case we need to decide which is better for the company, our clients and us all.  Opportunity cost can relate to money, storage space or time.


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