Consider whether it's more cost-effective to fix or replace older equipment. Choosing to fix it will have affects on your balance sheet, income statement and cash flow.
Equipment decisions were a lot easier to make when we had steady, consistent work. When you're comfortable with your cash flow, and it is consistently coming in, such decisions usually do not cause any financial or personal stress. But we're not in a position these days where we can forecast cash flow and, in many cases, may not get back to the good old days for another two years or so.
So, there you sit looking out into the yard that contains your equipment and related accessories. Some of it looks pretty good, some not so good and some you worry about every time it leaves the yard. You worry that you have enough equipment to do the work. You worry about equipment going down at a time when it will cost you most in terms of downtime and repair costs. You worry that if an important piece of equipment goes down that it will take two weeks to fix it. And finally, you worry about the pricing of rental equipment — if you're lucky enough to find the unit you need available for rent. In short, you have a lot on your mind.
Sooner or later you reach a point where you have to decide "do I fix it or get rid of it?" Now you get to do some heavy-duty thinking.
Pluses and minuses of repair
Making a decision to fix or replace construction equipment is a tough choice in this environment. You can fix it or, if the unit is paid for, set it aside and rent until your personal business environment settles down cash wise. If the unit still has a monthly payment obligation tied to it and you don't fix it, you get a double hit — the payment and the rental cost. Choice #2 isn't very smart unless you have a lot of excess cash to throw around.
If you decide to fix it, you have to understand that doing so has affects on your balance sheet, income statement and cash flow. On your balance sheet, your cash balances are reduced by the cost of the repairs, thus reducing working capital. On the income statement, the repair costs reduce net income. And if you do not finance the repair, the cost takes a permanent chunk out of the bank account. All negative results thus far.
On the positive side, the repair allows you to continue to work and bill for that work without any new fixed obligations to consider, which eventually replaces the cash lost on the repair. Most of you will include a maintenance factor in your overhead calculations, and as long as you stay within that budgeted number, any negative aspects of the repair cost will be minimal. On the other hand, if you incur a number of major repair jobs, you probably don't have enough in your billing to cover this cost, which makes your slim margins even slimmer.
Manage like a rental fleet
If you consider your equipment fleet as a rental fleet, you would develop an internal program to replace a certain percentage of your equipment every year to even out your costs for a period. For example, if you turn 20% of the fleet over every year, you wind up with half your fleet under water and half in the money when comparing the value to the note balance.
The same goes for maintenance costs. Half of the fleet is in the lower range of maintenance costs and half in the higher range. Where you don't want to be is in a position where a large percentage of the equipment requires a major repair in any one year. Working with such a program keeps maintenance costs consistent and on the low end of the range. It also provides flexibility if you need cash from selling off units that are four or five years old and "in the money."
Regarding a specific unit, if you have maintenance records to track costs and downtime, you can compare those costs against the cost of replacing a unit vs. a stream of rentals. The big issue is, of course, to keep the work flow consistent, because margins are thin and you cannot afford downtime. Nobody wants to see their profits fly out the door for a repair or rental that wasn't budgeted; but in some cases, it will be unavoidable.
Get a handle on your equipment. List what work needs to be done to make the equipment operable. Cost out the work so you know what it will cost when you get around to fixing it. Find out if parts are available for the repairs. Prioritize the work based on estimated need. Make the repairs and check the results. Use rentals when you can.
Replace the unit when the cost of repairs exceeds, on a consistent basis, the monthly obligation on a new unit. If the utilization of the new unit will not justify the purchase, then rent what you need and build the cost into the bid. Lastly, develop a fleet replacement schedule to help lower your equipment costs.
Garry Bartecki is the managing member of GB Financial Services LLP and VP Finance for the Associated Equipment Distributors. He can be reached at (708) 347-9109 or email@example.com.