2 December 2016

Why Waiting for EOFY Can Cost Businesses More Than They Save

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Why Waiting for EOFY Can Cost Businesses More Than They Save

End of year financial sale store front

Waiting for the end of financial year (EOFY) to undertake vital equipment upgrades and purchases may not be the commercially viable option you think it is. Fortunately for CFOs and corporate treasurers, alternative financing solutions can overcome the opportunity cost of not investing in vital equipment sooner and allow for much-needed productivity gains.

The end of financial year illusion

Equipment retailers often offer generous end of financial year deals to take advantage of tax benefits, reduce the time and cost of stocktake, clear out last season’s inventory, and bolster annual performance figures.

For many businesses, the lure of purchasing equipment at this time goes beyond taking advantage of sales season but as the time to allocate any surplus operating funds towards overdue capital expenditure.

In some instances, budget holders may even go out of their way to spend their entire budget allocation, since unused funds could be allocated to another area of the firm in the next annual budget.

However, these benefits may not generate greater value for businesses when factoring in the opportunity cost of not upgrading or acquiring assets when they are actually required. The opportunity cost is particularly burdensome in industries which undergo frequent technological development.

The October 2016 Alleasing Equipment Demand Index (the Index) found industries most negatively affected by outdated assets included agriculture, mining, manufacturing and energy. With these industries representing some of the largest sectors in the Australian economy, the issue of failing to keep up with rapid technological advancement could have a significant impact.

In the current economic climate, where businesses are under increasing pressure to reduce costs without compromising on quality or productivity, failing to implement cost saving equipment and technological upgrades could prove costly to a firm’s market position.

This is perhaps even more pertinent in terms of asset replacements. When vital operating equipment is no longer operating at full productivity, businesses are not only standing still by waiting until the end of financial year to rectify the issue, they are going backwards. In an increasingly competitive, globalised and disruptive economy, this is unlikely to be worth the meagre savings available at years’ end.

Frequently, the decision to delay asset expenditure is not purely based on these factors, but due to liquidity concerns and the need to wait until the end of the reporting period to confirm funds are available for equipment purchases.

For this reason, an increasing number of businesses are turning to alternative financing solutions to ensure they can invest in much needed equipment before they begin incurring these opportunity costs.

Alternative finance solutions

Currently, one in four corporates choose to purchase new assets outright, using equity in the business as opposed to flexible funding sources. In addition to removing the opportunity cost of not investing in technologically superior equipment in an expeditious manner, there are a host of other benefits linked with choosing an alternative solution rather than making an outright purchase.

Firstly, equipment finance can mitigate risk. Investing a large amount of capital into an asset that may not ultimately yield the degree of productivity desired, could inflict long-term damage.

Secondly, equipment finance solutions tends to offer customers more flexibility, as the terms can often be negotiated.

At the end of an asset life cycle, finance providers can assist in a more cost-effective and smooth transition to the replacement or upgrade of an asset. This compares to an outright purchase where often the remaining value in the asset is written off before a new large capital outlay is required.

These benefits, in addition to a more swift upgrade of equipment to prevent businesses falling behind in competitiveness and productivity, almost certainly outweigh the benefits of waiting until the end of financial year for any business.

New alternative financing solutions mean there is no time like the present in acquiring the equipment necessary for increased productivity and growth opportunities.

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