Its easy enough to calculate profit when you lease a piece of
equipment…but how would you figure break even point if you make an
outright purchase?
It was suggested to me that X number of jobs at $Y should equal
initial cost. Sounds reasonable enough. But If I’m buying this thingy
outright, shouldn’t I be looking for an increased profit within the
same time frame, over and above what doing it the old way would have
yielded? Should I expect increased profit per job, not just to pay
for the machine, but because profit (now or soon) is what its really
about?
Example…I lease for four years at $600 month or purchase at $20K.
Leasing it I know I have to produce $600 plus operating expenses to
cover the lease. >From then on, during that month I gain profit, it
being gross sales minus lease minus all operating expenses. Per job
price is figured by taking all those costs and factoring in a profit
margin, divide by anticipated volume of jobs… Simple, right?
If I purchase, its much harder, in my feeble mind, to grasp several
things. One, what is the usual time frame to recoup investment? Do I
simply ‘pretend’ I have a lease just so I have some sort of cost/time
perspective? Two, how severely am I effected tax wise if I purchase
vs lease? Should I factor that ‘penalty’ into my price determination
offset by interest savings?
I’m not going to lease. Done with avoidable long term obligations.
Been there, done that, no thank you. But if I have to wait four years
to break even, that doesn’t sound too enticing.
I’m looking to justify this purchase on sound business reasoning not
just cuz I want the darned thing.
Hi Neil
You can actually elect to deduct the entire cost in the year placed
in service/purchased…This is called Sec 179. The dollar amount
may have gone up, but it used to be limited to 108,000. There are
other limits as well. They have to do with things like percentage of
business use, income level, and your marital status. As always, you
should consult with your CPA. It is important to note, however, that
if you elect to take section 179 this year and, later, you stop
using the piece of machinery before its useful life has run out, you
may have to “recapture” depreciation taken under section 179. This
means that the amount of depreciation that would have been left on
the item had it been depreciated over its normal useful life would be
added to regular income. This is probably not anything to be overly
concerned with though. In your example, the thingy only costs 20,000.
Someone who takes the full 108k deduction every year would fall under
much closer scrutiny.
You could use the IRS’s idea of useful life as an estimate to figure
your per job price on the item, but IRS ideas of useful lives are
very long. Probably, you would say to yourself…“If I buy this
thing, I am likely to get good use out of it for about 10 years and
then I’ll trade it in for a new one” Then, you have a basis to
figure (approximately) how much it will save you over time.
Kim Starbard
http://www.kimstarbarddesigns.com
Neil,
First off, congratulations on your expansion.
I think that if I were in your situation (with cash in hand) I would
have to figure how else my money could help pay for the lease. In
other words if I purchased gold, diamonds, or other merchandise that
I sell on a regular bases, how much income will be produced from
that in addition to the income earned just from the use of the tool.
I think if you look at the overall picture you will be money ahead,
and if the tool really isn’t as productive as hoped for you can still
pay for it and continue to grow as a business.
Keep your gravers sharp.
Christopher Arnett
www.christopherarnettjewelers.com
Should I expect increased profit per job, not just to pay for the
machine, but because profit (now or soon) is what its really about?
Neil, you forgot to factor in depreciation. The questions you ask are
the realm of accountants, and I’m sure you’ll get that - I’m
interested in what some say, too. On another level you need to take a
longer view, that more of the right equipment makes you a better
business, and brings in more business just by being there, whether it
actually pays for itself in the real sense or not. I got out of the
lapidary business, though I miss it at times, because it just didn’t
pay in the way I was doing it, and the equipment was untouched for a
long time. I’m just saying that it will make people say, “Let’s take
this to Neil, he’s well equipped.” instead of someone else. Even if
it takes 20 years for the investment to actually pay, it’s increasing
your assets just by being there.