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Purchasing prudence

By:
  • Mike Rorie
- Posted: September 27, 2017

Equipment and contractors: Are these two things synonymous? Often, they are. In general, many contractors in outdoor industries like snow removal understand the significance that equipment plays in the success of our companies. It seems that when contractors start out, they’re underequipped and always looking forward to the next truck, loader or big piece of equipment they plan to purchase.

Equipment equals capacity and ability, and perhaps even success to them. In many cases, that is true. But it’s important to understand that equipment is a tool for your business, much like key people, great systems or a good marketing plan. Be strategic about it and careful not to overindulge in it.

More equipment = more overhead
When most operators start out, making capital purchases is inevitable and necessary; however, the bank is typically reluctant to lend new companies more capital to be deployed on equipment purchases. Why? Every time we increase our equipment inventory we increase our overhead. Without seeing the increase in revenue and efficiency, banks and lenders are reluctant to fund these additional purchases.

When you can show the bank or leasing companies a consistent track record of increased revenue, and a ratio associated to the equipment necessary to confidently capture the work, then typically their checkbooks open up.

What I have witnessed over the years is once a company grows and understands the relationship between revenues and equipment costs, they often lose discipline and make unnecessary purchases.

There are many reasons why contractors are willing to do this:

  • Most contractors have an affinity for their “iron.” They want it, so they’re willing to pay for it.
  • They can afford it and have lines of credit in place to allow for quick purchasing decisions.
  • They often don’t have the proper metrics in place to make strategic, analytical purchases relative to the increase in overhead they are about to assume.

Smarter, more sophisticated business operators understand that equipment is a tool to make money. Rather than buying more equipment because they can afford it, they become scientific to get the greatest return on their investment when making purchases.

Strategic purchasing
In my first 20 years as a contractor, my love for equipment was a large part of my love of the business. I can remember when we had people from larger companies visit our branches and how they would comment that we were “equipment-rich.” At the time, I was puzzled by that.

I also remember visiting larger companies doing tens of millions of dollars more a year than we were. What I quickly learned was their equipment use, and/or the lifetime of the equipment was at a much higher level than an independent contractor with one location.

Why? Because larger companies have figured out the right amount of equipment to buy each year, and the right type of equipment and fleet to run their operations as efficiently (and effectively) as possible. They continually measure and monitor, and look for improvements as to how to get more use and tighter cost control over these items regardless of category. They understand that to grow, you need to be able to effectively manage your costs, specifically when making capital purchases.

Finding trucks and equipment that hit the bulk of your sweet spot are much more beneficial. Repeatability coupled with standardization should be the cornerstone in building your business model.

As an example, in 1989 we bought a specialty piece of equipment: a 16-foot batwing mower for large properties, thinking it would increase our mowing efficiency. What we learned was the utilization factor with a specialty trailer and a special operator wasn’t worth the ROI. It was an expensive machine and it wasn’t worth the hassle of getting it to the site.

Benchmark and measure every capital purchase within your fleet against other identical pieces in your fleet. Engine hours and odometers, revenue per year, as well as GPS can all provide insight as to the use we’re getting from the tools and equipment we’re purchasing.

Batwing_mower (300x203)
Buy wisely: proceed with caution when buying specialized equipment that may not justify the ROI.

Keep it or let it go?
Contractors struggle with this all the time. Should you keep it until it’s no longer useful, or is there a special method to trade it in, sell it and purchase new again? There’s an intersection for all equipment that crosses the highest use with lowest operating cost and highest resale. This is the intersection with the greatest return on investment for a company.

Keeping track of the items I mentioned as well as reviewing industry cost study guides can help you gain insight as to what kind of expectation you should have for equipment in your company. Benchmarking equipment is an absolute necessity to dialing in specific timelines for maximum ROI.

The depreciation in most landscape and snow removal company models wouldn’t be greater than a single digit percentage on your P&L. The further above single digit you operate would indicate less use, just as the lower percentage would mean very high use. These are general comments relative to a company’s P&L, and the industry segment you’re in will also determine where you would be precisely.

Whatever you decide about the lifespan of your equipment, I encourage you to be consistent and stick with it. Purchasing, maintaining and repairing a variety of trucks, loaders, equipment and specialty tools can get very broad, and very expensive. You must be disciplined when you purchase something to establish where the intersection of greatest ROI exists in that piece of equipment’s life.

Mechanics
Another important aspect of a growing fleet to consider is whether you want to employ a full-time mechanic or a fleet manager who manages the fleet and mechanics. There’s nothing wrong with employing mechanics; they’re often very valuable to an organization. But we must consider what their scope and time is spent on versus continually repairing equipment with a high cost for parts and labor.

Management of your fleet, equipment and tools is a far better mindset for this individual than simply repairing the equipment past its prime potential for hitting the intersection of highest ROI and highest use.

Ideally, you want maximum optimization of your equipment while only conducting preventive maintenance. This means you’ll be turning it over before you begin repairing it. This philosophy would often follow a lot of your warranty schedules and pre-negotiated trade-in values or buybacks from the supplier because you would be repurchasing at a higher frequency.

Lease, finance or pay cash?
Should you lease, finance or pay cash for something new? A financial person can give you the best guidance as to choosing the correct financial method. What contractors need to shift their focus toward is getting the ROI or the proper amount of use from these capital purchases.

Over the years, as my business became larger and more sophisticated and my business acumen increased, the driver for our equipment purchases changed. Rather than filling up our garage with the shiny new pieces we wanted, we shifted our priorities and focus on the need to increase our bottom line, viewing equipment as a necessary tool or commodity to capture additional earnings and profits.

Happy motoring
Enjoy your equipment, particularly the new pieces that you work so hard to add to your company. But know going in that ROI needs to be associated with those purchases. To continue to grow your company, you’d like to see the efficacy of your equipment purchases to revenue ratios go in your favor, not the other way around.


Purchasing solutions

  • Don’t fall into the trap of buying equipment “because you can.” Buy strategically.
  • Purchase equipment that will help increase revenue and efficiency. This will look more favorable to banks when it’s time to seek financing.
  • When hiring, don’t compromise. Make sure prospects will embrace your vision and established culture.
  • Benchmark and measure every capital purchase.
  • Standardize your fleet for more efficient maintenance, parts and training..
Mike Rorie has been a participant in the snow and ice industry for nearly four decades. He is now the owner of GroundSystems, as well as the CEO of GIS Dynamics, parent company to Go iLawn and Go iPave. Contact him at Sales@gisdynamics.com.
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