The High Costs of Equipment And Vehicles
The high cost of equipment demands that owner-managers have an in-depth understanding of the cost of owning and maintaining specific types of equipment, to ensure that it contributes to a positive return on investment. Factoring the significant costs of equipment ownership into a pricing formula could increase your sales figures and at the same time, help you understand where you can reduce present and future costs – and improve your bottom line.
Businesses spend a great deal of time reviewing salary and wages, both to control cost and to determine billing rates when providing estimates or billing clients.
Next to wages, vehicle and equipment ownership and operations are among the higher-expense items within a profit-and-loss statement. Yet, very few businesses monitor the cost of owning and operating vehicles or equipment. Instead, they may simply fold it into the price of doing business without analyzing it further.
Whether your business needs a front-end loader costing just south of $500,000, or a working truck in the $90k to $100k range, analyzing the cost and contributions that these assets make to the business may contribute to a more satisfying bottom line.
To better understand the benefits of job costing each piece of equipment, consider this advice:
This information in turn provides a basis for quoting jobs, as well as documentation you can use if you’re considering future equipment purchases.
- Consider recording the cost of powering the equipment. Whether the source of power is fossil fuel or electricity, knowing the operation costs is a major consideration in an energy-expensive world.
- Downtime of all equipment should also be recorded. Knowing how many hours equipment is out-of-commission due to mechanical failure is essential to:
- Understand the cost of repairing the equipment.
- Determine the lost opportunity cost because equipment cannot be used.
- Establish whether that brand of equipment meets job requirements.
- Compare the downtime to that of similar equipment, so you can analyze based on hard numbers which is the most reliable or usable piece of equipment.
- Purchasing equipment usually requires financing. Interest is a cost of ownership and, as such, should
- be recorded for each specific piece of equipment. Factoring interest costs into the operational cost of the equipment forces management to consider whether charge-out rates need to increase, or whether leasing or renting is a better alternative to the cost of ownership.
- Consider extended warranty cost as part of the cost of operating equipment. If extended warranty is included, you as an owner-manager may wish to consider extending the useful life of the equipment to align with the extended warranty period, which will help you cost jobs or hire out equipment.
- Finally, be sure to record revenue earned using the equipment based upon the predetermined hourly charge-out rate. Knowing whether the equipment is paying for itself helps determine whether your business should purchase additional equipment, sell the existing equipment or rent similar equipment in the future.
JOB COSTING
Establishing an asset-specific costing process is not as difficult as you might think. Most quality bookkeeping systems will have a job-costing module that already allows posting of expenses and/or revenues for reference purposes. If your software does not have this kind of module, you could also build a spreadsheet to record the cost and revenue attributed to specific assets.
The hard part is to ensure that all employees are trained to record the additional required information. For instance, when an in-house mechanic repairs a specific piece of equipment, the time spent on the repair should be documented to allow posting to the job cost for that equipment.
Bookkeepers must also be able to identify the invoice associated with the cost of parts for that specific equipment repair, for their job-cost posting. Each business will need to adapt its procedures to accommodate its software.
Naturally, all the recordkeeping in the world will not benefit the bottom line if management does not review, on a regular basis, the results of their decision to rent or lease an asset.
Reviewing this data allows management to:
- Determine whether usage of equipment dictates that the business will need a replacement earlier than suggested.
- Consider whether the asset is bringing an advantage to the business.
- Compare similar equipment to determine which brand is less costly to maintain in future.
- Determine whether your employees have a possible bias towards a specific piece of equipment that may sway future purchase decisions.
Using a fact-filled approach will help you arrive at decisions about acquiring future equipment to be purchased and related cash-flow requirements. It will also help your business take action to ensure that financial data, corporate records, and lines of credit are up-to-date, so you’ll be able to secure financing for any future replacement assets.
Learn more about how to read and understand financial statements in How to Read Financial Statements: A Guide for Business Owners.
Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.
Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.
