While 2021 brings continued economic uncertainty, it’s always a good idea to use a new calendar year as an opportunity to reevaluate business plans. What’s working and what’s not? For manufacturing professionals, this can be a literal consideration: what equipment is running efficiently and what’s nearing the end of its useful life? Aging, worn machinery is costing you valuable time and money that’s preventing you from being competitive. Determining the return on investment for buying versus renting equipment requires a deeper dive into your company’s cash flow and your intentions.

Buying New

Some people have personal biases when it comes to purchasing items. Think of other investments you’ve made. Are you a staunch advocate of homeownership over renting property? Maybe you’re always trying to dissuade your friend from leasing the latest and greatest model car because they won’t acquire any equity and it won’t be their own asset. Try not to let feelings about leasing bleed into your business model because buying won’t always equal profitability. To determine if it’s time to buy, you need to assess the performance of what you’re currently relying on. Track the machine’s cycle time and uptime (when the machine is producing revenue) as well as any downtime required for regular or unscheduled maintenance. This data will help you to determine if new equipment will produce the ROI required to rationalize the purchase. Your manufacturing company has needs unique to your products and services. In some circumstances, buying is the way to go, as leased assets don’t qualify for 100% first-year bonus depreciation.

Opting to Rent

If you opt to rent or lease your equipment, you’ll get brand new machinery operating at maximum output and efficiency. You may also be able to shop outside of your budget, opening opportunities to test-drive cutting edge technology before committing to a major purchase. Consider the long-term usage of the equipment and how much profit it will generate in its lifespan. For example, if you’re only using the equipment to fulfill a two-year contract and you don’t see other profitable opportunities, maybe it’s better to lease that piece for two years rather than make a huge long-term investment to fulfill a temporary need. Let’s talk tax benefits. While annual deduction limits may apply, generally speaking, payments for leases will be tax-deductible and qualify as “ordinary and necessary” business expenses. But as with any contract you’re tied to, you must read the fine print and make sure your business plan is aligned with the terms and conditions. It’s never fun to sign off on a big expense, only to be surprised by an early-termination fee you weren’t aware of.

We wish there was a straightforward, clear “winner” in your decision, but as is standard in business, the most economical choice is going to depend on the circumstances surrounding the machinery. In some situations, purchasing machinery and acquiring an asset you know is going to build your business equity is the best decision. In other situations, you will find leasing is the right move, so you can test out a high-tech item without the risk of purchasing an expensive machine that’s bound to become obsolete when the latest model rolls out. Our best advice is to consult a professional to weigh the pros and cons carefully before committing to a big financial decision. Our team is always just a phone call away to answer questions unique to your company’s situation.

Source: Accounting Freedom

While much of 2020 feels like a bad dream, it turns out we can all learn a lot from the hectic hunt for the last toilet paper roll in Hudson Valley. We know, your house is stocked up for the rest of the year, and you likely don’t want to relive the nightmarish shopping experience you had at the start of the pandemic. But hear us out, because we think there’s a lesson about inventory management hiding somewhere deep at the back of the shelf, and we want to help you find it. After all, how much money could you be saving by avoiding an inventory headache and getting a better handle on your manufacturing supply? Instead of coming up short or getting bogged down and tying up valuable cash flow, there’s got to be a better way. It’s time to consider the 80/20 rule, find the value in tracking, and embrace emerging technology.

80/20 Rule

As a general rule, 80% of your profits come from 20% of your stock. Make sure you are not prioritizing the wrong inventory by reevaluating what you have. Controlling excess inventory levels will ultimately help your operation maintain better cash flow through these challenging economic times. To do so, you should understand the complete sales lifecycle of items you sell on a weekly and monthly basis. Categorizing your inventory into priority groups can help you understand which items you need to order more frequently and which are important to your business but may cost more and move more slowly. By following this rule, industries handling rapidly changing products can avoid overstocking raw materials and excessive levels of scrap.

Track, Track, and Track Some More

Accountants have this tendency to make a list, check it twice, and then check some more before we are satisfied. Adopting this mentality may initially feel tedious, but trust me – the financial savings will be worth it. Inventory information tracking should include SKUs, barcode data, suppliers, countries of origin, and lot numbers. Tracking the fluctuating cost of each item over time is also critical to ensure you are aware of factors that can impact your bottom line. As history (and the pandemic) has taught us, scarcity and seasonality can have a huge impact on production. Maintain sensitivity to the supply chain by tracking information, making that information accessible to your team, and keeping sufficient levels of essential materials in stock. Identifying a pattern will come in handy during the next unforeseeable inventory disruption.

Time for Tech

Adopting inventory management software is one of the most important things you can do to stay proactive. In RBT’s previous Manufacturing Thought Leadership article, we discussed the Internet of Things or, IoT. If you’re not comfortable with this concept, it’s time to recognize the power of interconnected smart devices! Forbes estimates that the adoption of IoT in the retail sector will reach 71% by 2021. Manufacturers can leverage IoT-tracked inventory information and AI technology to optimize lead times. By comparing new data with an organization’s procurement records, inventory levels, and sales history, AI bots can predict supply shortfalls. Translation: a tech investment today can mean huge financial savings tomorrow.