The Key To Growth Is Seldom More Equipment

I regularly talk with business owners who are either doing well and wanting to grow, or having problems and requiring additional revenues. The most common thing I hear from these business owners is lamenting the idea that they need an expensive, large, state-of-the-art piece of equipment that they believe would solve all their problems. It’s an amazing concept that I do not truly get, but it’s very common.

For example, I have a client who is bidding on some snow removal work and is already salivating over the thought of the new trucks and sanders and plows he will need, never bothering to do a cash flow to see how much it will all cost and if it is even possible to make the monthly payment all year long and what the new equipment will actually earn. The owner is already contemplating the add-on accessories he will need to make this all work, fully believing the shortest path to greater revenues and liquidity is with new equipment that will permit expansion and greater efficiency. He tells me how the new equipment will support his existing business as well, arguing himself into the only conclusion possible: it’s a must buy. With this logic, the answer to many revenue questions and issues appears to be buying a new piece of expensive equipment. Better yet, buying a few new pieces and expanding capabilities. It is worth noting, this same person has an array of state-of-the-art grass cutting equipment that he uses only on Saturdays for one or two clients. The equipment he already has is not even being utilized to capacity.

So, what is really the answer? It may be different for every business asking this question but more than likely the key to growth and development first starts with making adjustments–some major–in the three fundamental areas of a business: finance, operations and sales/marketing. In other words, let’s make the core underlying business work better, be more profitable and productive, and then let’s grow on a strong foundation based on a well thought out business plan and cash flow proforma.

Let’s get the business working well and profitably first. Buying new equipment comes second.

The first four questions I ask regarding the acquisition of new equipment are:

1. Have you contemplated the financial impact of such a purchase, including repairs and maintenance, insurance, sales tax, operating expenses, monthly debt service, cash down to make the purchase and the financing requirements?

2. Have you contemplated the operational impact, such as who runs the machine, whether it requires additional employees and training, repair and maintenance needs, insurance, etc.?

3. Have you devised a sales and marketing plan to capitalize on the new, enhanced capabilities the new piece of equipments will provide? Tell me how this equipment will help support existing business more efficiently and effectively, producing more income for the company.

4. What can you tell me about retained earnings supporting the budget for such an acquisition?

Without having these four issues resolved there can be no rational basis to purchase new equipment. Really, these four questions need to be addressed in regards to your current business and not just to rationalize the acquisition of new equipment. Perhaps the real answer lies in doing a better job with what you currently have, as opposed to adding equipment. Usually the answer is to do a better job first, increase productivity, refine financial controls and support sales and marketing more effectively. Do more with what you have before you add expensive equipment.