Are You Using The Right Strategy For Equipment Investments?

Warren Buffet has made a fortune off of the “buy and hold” principle. The theory of the most successful investment is that you get in and stay in for the long haul because most investments inevitably mature over time. Your business equipment is an investment, to be sure, but equipment investment does not operate along the same principles. This means that investment strategies for equipment need to be vastly different than other types of strategies.

Most investments appreciate, equipment depreciates

It is a common misconception that the best strategy for equipment investing is to purchase new and get the most use out of it before replacing it. Over time, however, not only does the value of equipment depreciate, but its effectiveness does as well. Take a forklift, for example. A single forklift can run upwards of $50,000 but can theoretically be used for 10 years or more, depending on how heavy usage is. The less you use your forklift the longer it will last. Conversely, however, businesses that demand heavy usage also depend more heavily on equipment to turn a profit. When your equipment is out of commission, it slows down business.

Therefore, you can’t simply look at the cost of maintaining equipment versus the cost of replacing it. You also have to factor in how much any downtime is costing you while equipment is either being repaired or – even worse – waiting to be repaired. If you own 10 forklifts and 2 are awaiting repair, that decreases productivity by 20%. If you need to wait a week or more to get both forklifts repaired, you can only operate at 80% capacity during that time. If you keep getting one forklift repaired just to have another one go down, you will never be operating at peak capacity.

Sound investments depend on understanding maturation

To determine the appropriate maturation date of equipment, you need to consider 4 factors:

  • The type of equipment (age, make, manufacturer)

  • The severity of application

  • The number of operational hours

  • The type and frequency of maintenance it needs or receives

The more general maintenance you do on your equipment, the longer its useful life may be, but the more it will cost you up front. Conversely, the less maintenance you do, the more frequently you may have to replace your equipment, but you also save on maintenance costs. Ultimately, the less you use a piece of equipment, the longer you might want to hold it. The more you use it however, the more frequently you may want to replace it – even if it doesn’t seem to yet need replacing. 

Find the sweet spot

Buying equipment new is not always the best strategy either. In many cases, buying a used piece of equipment with low usage can actually save you a great deal of money, particularly if you don’t continue to use it until it is completely worn down. In many cases, the best investment strategy is to buy lightly used equipment, only use it for a few years and then sell while you can still recoup some of your investment.

1 Comment

  1. A great strategy for equipment investments.

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