At least once in the life of a business, the owner has to decide whether or not to make a certain purchase. This decision is not informed by the success of the business but by the toll which such purchase will inflict on the business’s cash flow.
For instance, a hauling business might require a new truck because one of its trucks is completely damaged or un-roadworthy. Perhaps another business might need some new space because of the increasing size of their operation, or maybe the office just requires a new industrial printer. How do you decide to make this purchase without severely affecting your cash flow?
The simple answer is that you cannot make a large purchase without affecting your cash flow. However, using the tips below, you can manage your business in such a way that it cushions the blow of such a large purchase without crippling business operations.
Never make a large purchase on impulse despite the urge. A large purchase essentially depletes a large chunk of your operational expenses. In an instant, the cash flow will reflect negatively. If such a situation continues to prevail, the business may soon be unable to pay its bills or meet its operating expenses. Eventually, it will die.
Planning for a large purchase well in advance will help you deduct a little from the operating expenses over time, thus cushioning the heft of a single large blow on the cash flow.
In the land of the brave, young enterprises are given tax reliefs on purchases made before the business starts generating income. The IRS provides tax breaks for certain categories of services such as travel expenses, salaries, and fees to consultants, salaries and wages for employees, advertising costs, expenses incurred in market analysis, products, and labor supply.
Collectively, these are referred to as “startup costs.” Although the purchase of equipment is not subject to the tax break, proper planning of expenses can help reduce the burden on large purchases.
As of January 2019, Section 179 of the Tax Cuts and Jobs Act limits the tax breaks on equipment to $2.5 million. Used equipment may also be depreciated up to 100% in the first year.
The endgame of any large purchase in a business is that it will do more good than harm. Investment appraisal involves an assessment of the return on investment leveraged against the cost of the purchase. It is sometimes referred to as “capital budgeting.”
Modern technology has made it very easy to complete capital budgeting. Software like QuickBooks will quickly do an investment appraisal for you. However, it is always wise to seek the opinion of an accountant.
Did you know that winter coats are more expensive in the winter and least expensive in the summer? Well, the same goes for most merchandise on the market. Every service or equipment has its peak season. At this time, it is the most expensive to acquire.
This is because the demand is higher. When the demand goes down in the off-peak season, so will the prices. By following the seasons, you can get the best deals on products and services. This way, you can hold off what was to be a large purchase until it becomes an affordable purchase.
This point may well go hand in hand with investment appraisal. After you make an appropriate investment appraisal, you should monitor your cash flow statement to compare the financial benefits of the purchase over time.
For instance, while an industrial printer dents the cash flow statement now, in the long-run, it will reduce the costs of operation and ultimately recover its costs. On the other hand, a purchase that will continually deplete operating expenses will not be a viable option for purchase where the business lacks disposable income.
When that time comes that you need to acquire a large purchase for your business, do not worry. Take these give pointers into consideration, consult an accountant, and now make a wise call. Do not forget to check for tax breaks, either. Your accountant will help you handle and assess the financial health of your business. Determine the possible risk linked with a purchase before taking the final decision.