Compared with other expenses in your business, equipment is one of the largest line item expenses. Equipment purchase and maintenance costs are as significant as material and labor costs. While material and labor are variable direct expenses, equipment impacts your cash flow differently since it is a variable direct expense (i.e., fuel), operational overhead (i.e., repairs, insurance) and nonoperational overhead (i.e., finance/purchase cost).
Winter snow work is not kind to equipment, and all equipment has a life expectancy. Pumps wear out, metal fatigues, and repairs become more frequent. Downtime in a snow event can be more costly than the line item cost to fix the equipment when you factor in opportunity cost and the potential of not fulfilling your contractual obligations. Despite your best efforts at preventive maintenance, replacement will eventually become necessary.
You can also purchase equipment to expand capacity. It is necessary to preserve enough reserved capacity in your fleet to account for breakdowns, heavy or continuous snow events, or for the late-arriving storm that requires extra pieces on the road to reduce route times. Own, rent or have access to enough equipment to account for the things that can (and probably will) go wrong in a storm event.
You expect a return on your equipment investments, but finding the right equipment to best service your clients will help you maximize that investment. There are several factors to consider when determining that balance.
Use the right equipment
Select equipment that is appropriate for the job. Just because you own it doesn’t mean it’s the right equipment. For example, you may own a skid steer, but it may cost more in the long run due to the loss in productivity and capacity than using a backhoe. Rent a backhoe if necessary and free up your other equipment and capacity for other sites or as a backup.
Capacity and cycle times
Factor the production capacity of the equipment you’re using. Size the power unit and snow equipment for the job. An 8-ft. straight blade could be upgraded to a 9-ft. multi-positional plow, increasing your capacity by 25% or more. A 12-ft. pusher may be better than a 10-ft. at night, and better than a 16-ft. that works well at night but might not fit in the aisles between parked cars. A crew-cab dual rear-wheel pickup with an 8-ft. bed and 10-ft. plow with wings might be efficient at plowing large, open spaces like access roads, but is likely too large for smaller commercial lots, particularly with traffic, so any efficiencies you had hoped to gain may be lost in maneuverability.
Consider the “Goldilocks” principle: too small, too big and just right. Equipment that is too small for a larger space is just as inefficient as too large of a piece for a small space. By improving your equipment selection you may be able to reduce the cycle time to complete a property, which can reduce the intervals between servicing sites or simply increase your capacity to produce more work in a given period of time.
Used vs. new
Used equipment may be a viable option, but there’s some risk when buying from unknown sources or when you’re concerned about the equipment’s history. However, you can balance this with the experience you’ve had with new equipment and how often you’ve gone to the dealer for warranty repairs.
When you buy new, you take the initial depreciation hit. Consider how much a new truck would sell for a month after leaving the dealer’s lot. Your initial investment for used equipment will be lower, making it easier to recoup your investment or improve your ROI. Consider the case for used equipment on specialty, less frequently used equipment like a snowblower for a wheel loader.
Replacement equipment can be purchased on a schedule that best suits your company’s needs. Do you run trucks for four, five or 10 years? If you have not developed a pattern, begin tracking maintenance and repair expenses. Assuming you do not experience critical failures during storm events and your average monthly maintenance expenses are the same or less than the financing cost for new, it pays to keep your older equipment as long as it performs reliably.
You must balance the need to buy equipment early enough to have it when you need it, but not so early that you are incurring unnecessary expenses for surplus equipment. Factor the lead time for buying new equipment, including manufacturing time and seasonality issues, to ensure you have it on hand when you need it. Used equipment may not always be available.
You may have equipment that’s old enough to warrant upgrading to keep up with new technology. While the machine may function reliably, is it the most productive piece of equipment to run during a storm event? Loaders, for example, consume less fuel per hour now than they did 25 to 30 years ago. Perhaps the older loader would be better suited as a yard machine or backup piece of equipment.
Buy, lease or rent?
Short-term lease or winter rentals are an option to provide you with winter equipment you would not otherwise use in warmer months. While the monthly rental expense may seem high, consider the carrying costs for the other six months of the year. Financing, insurance, storage, decreased cash flow, maintenance, and lack-of-use-related issues are a few expenses you will incur during the warmer months that could make a winter rental an attractive option.
Paying cash for new equipment is an option, but consider the value of the cash should you need it for payroll, salt or other expenses midseason. Don’t depend on your cash flow alone to support your winter expenses - you need surplus operating capital in the winter months. Spreading out your expenses, particularly for larger equipment investments, helps maintain cash flow and keeps you more liquid. Evaluate the interest expense you’ll pay and determine the cost of financing. If you’re evaluating the difference between using cash and a higher interest rate, you might consider using the financing for a short period of time. Buy the equipment preseason, making payments through the winter months, and then pay off the loan early. This gives you options you would not have if you paid cash up front.
If you choose to finance your equipment purchase, use a term loan where the principal plus interest is paid back in equal monthly installments over a fixed term. Avoid using a line of credit, which is designed for short-term expenses you intend to pay off in less than one year.
Your equipment plan will evolve over time to reflect the needs of your business and the types of clients you serve. Don’t be afraid to take some calculated risks and try new technology or equipment if you can measure a return. Equipment is a sunk cost, and there is no reason to hold onto something that isn’t performing for you. If and when you realize you made a mistake, consider reassigning the equipment for a better use or sell it to acquire a better option. While there is some value in brand loyalty or brand consistency, don’t limit your selection purely based on brand. Explore various options as you tinker with your equipment formula and look for the impact on your bottom line.
Douglas Freer, CSP, owns Blue Moose Snow in Cleveland.