Maintaining a high production volume and staying on budget are two of the biggest concerns our clients usually have about their upcoming jobs. In fact, most businesses can probably attest to having the worry that they will go over budget trying to meet production goals.
Construction companies, in particular, may face very tight budgeting restrictions, which forces them to think long and hard about how they’ll approach expenses each year. They also have to get creative in figuring out how to get the most out of their budget while keeping up with production needs, if not exceeding them.
Meet production goals
Production goals will vary between the business and its aggregate, but it’s generally measured in tons per day. The more tons you’re able to process each day, the higher your production; and it’s important to set baseline goals to support your bottom line so you know how to improve, and if you’re in danger of failing to meet a day’s given production goals.
Your daily production is affected by other factors including worker efficiency, and whether you performed maintenance or repairs that day. The key to handling the low production days is ensuring you stay on budget while you play catch-up or recover. This makes budgeting the most important part of your project’s plan because you have to make estimates and consider different outcomes that won’t occur until further down the road. So if you don’t want to spend more than you have but maintain a profitable level of production, start with understanding your budget.
Understanding your budget
Every project has a different budget they have to maintain, but it’s important to understand your financial limitations before proceeding with any big decisions, such as equipment purchases and rentals. Deciding whether you want to rent or outright purchase can be one of the biggest factors to influence your company’s ability to stay on budget and still maintain a high volume of tonnage.
When you know your budget then it’s time to carefully allocate those funds.
Identify expenses
This involves creating a list of the parts and machines you’ll need, as well as any personnel, vehicles, and other miscellanea your project might require. Everything should be accounted for so you know how to meet production goals in the most fiscally efficient way possible. If you don’t have enough to purchase the new equipment you could choose to buy used pieces, or you could simply rent equipment. If you know how long your job will take, deciding between new and used and purchase/rental becomes much simpler.
What many companies don’t realize is that there are financial perks to purchasing and leasing equipment—tax deductions and incentives that may make equipment costs much more manageable, which is particularly important for projects with a strict budget.
Pros and cons of leasing
Renting equipment preserves capital, offering financial flexibility with the potential downside of costing more over the course of time (as opposed to upfront). Some of the advantages of leasing include…
- Cost-effective: Leasing equipment requires a smaller initial expenditure compared to purchasing.
- Deductible: Rentals could be classified as businesses expenses, thus becoming tax deductible. This lowers the net cost of the lease.
- Flexibility: It’s usually easier to lease than it is to secure a business loan for purchasing equipment. The terms may also be more flexible, and makes a good advantage for companies with poor credit, or who require a longer repayment period to lower their costs.
- Upgradeable: The great thing about rentals is that when your lease period ends, you can upgrade to a new piece if the previous one is outdated or no longer meeting your needs.
There are downsides to leasing your equipment that should be considered as well.
- Lack of ownership: The most obvious downside is that you won’t own your equipment. That means you won’t build equity in it.
- Lease term obligation: Like any other kind of rental process, you’re usually obligated to make regular payments on your equipment, even if you have to stop using it. You might be able to cancel the contract under specific circumstances, but hefty termination fees could apply.
- Higher overall cost: Interest and repayment rates may increase the cost of something by several hundred dollars, or even thousands of dollars, compared to what you would have paid for simply purchasing a piece of equipment outright.
Pros and cons of purchasing
Buying your equipment and machinery is a huge financial commitment so it’s a good idea to familiarize yourself with the benefits and disadvantages of making that decision.
- You own it: Ownership of a piece of equipment demonstrates a long-term investment in your company. Purchasing equipment is a great idea if you don’t anticipate the technology becoming outdated any time soon, or if you don’t want to manage payments or the hassle of a lease contract. You generally have the option to buy new or used, so consider the needs of your budget before deciding.
- Tax incentives and deductions: There are tax breaks companies can take advantage of that will allow them to deduct partially or fully the cost of new business assets in their first year of use. This depends on how long the equipment lasts for. Similarly, there are some deductions such as the depreciation deduction that may allow you to recover the cost of some of your purchase expenses.
As for owning, there are two noteworthy disadvantages to purchasing your equipment.
- Lack of upgradeability: Unless you’re certain that equipment you purchase won’t become obsolete in the near future, you could be stuck with it. This would force you to invest in a newer equipment, and receiving very little on the resale of your previous equipment.
- Higher initial investment: Unless your budget is bigger, you may have a difficult time affording the high initial expense. Borrowing money to make that purchase could add onto the overall cost, further increasing the amount you spend on buying something outright.
Remember: It’s important to consult a knowledgeable accountant before trying to determine if a cost is deductible or a capital expenditure. If you’re only using equipment part time or you can complete the job in under a year, you could be able to declare something that would have been a capital asset as a business expense instead, increasing your ability to recover the cost of leases and purchases.
Plan for future expenses
Parts may need to be replaced. Production could increase, necessitating more equipment, labor, or machinery; plan your budget accordingly so you’re prepared to spend what’s necessary to meet production goals.
You need specific tools, machines, and equipment to do business and its best for your production goals to avoid missing any of those essentials. Meeting budget is about manipulating the available funds to ensure you have everything you need to produce a high volume of aggregate or other material each day. Companies have options when it comes to staying on budget, from leasing over purchasing, to buying used as opposed to new.
