When is the right time to Lease?

As EOFY approaches, finance teams are called upon to consider the yearlong snapshot of their financial strategy and provide reporting to investors and stakeholders.  This is the moment of pause before resetting for FY25 to consider the exponential momentum of technology and its potential to generate greater profitability.  Deciding on pathways to realign operations is usually a matter of deciding both what equipment is required to elevate and organisation and how to build the financial pathway to acquisition.  In short, how can we bring prohibitive acquisition costs into range?

Capex Vs Opex.

Capital Expenditure (Cap Ex)  is the money an organisation spends on purchasing equipment.  Large capital expenses are seismic financial events that constrain spending elsewhere in the organisation.  Over time, an organisation may build an extensive collection of equipment at considerable expense for the purpose of creating future growth eg purchasing a new manufacturing machine.  This purchased equipment appears on the balance sheet as assets and their depreciation is counted over the useful life of the equipment.  As time moves forward the opportunity cost of the capex must be weighed against the concurrent contribution of the new equipment to ensure financial stability. As this equipment ages toward obsolescence it will be time to  consider the costs associated with replacement.

Operating Expense (Op Ex) are the ongoing costs for running a business including day to day operational expenses like equipment leasing.  It is possible to reconsider the CapEx of buying new equipment through the lens of equipment leasing thus converting Capex into Opex.  This reconsideration affords considerable strategic advantages such as;

  • Reduce the cost of entry with no large upfront costs
  • Consider an ideal equipment order based on affordability of lease payments vs Capex.
  • Lock in stable repayment rates over the full life of the lease
  • Provide flexible end of term options to ensure your organisation is not stuck with expensive obsolete equipment
  • Achieve real time payback with equipment generating returns from day one with deferred opex over the lease term.
  • Preserve Capital  for the nurture of other strategic priorities.
  • Maintenance and upgrades, leasing shifts the burden of ownership and maintenance costs to the lessor.
  • Flexibility: Leasing provides flexibility to upgrade equipment, adapt to changing needs, and avoid long-term commitments.

Locking in Repayment Rates

One of the key advantages of leasing is the ability to lock in repayment rates. Unlike traditional loans, where interest rates can fluctuate, lease payments remain stable throughout the lease term. By making leasing decisions now, businesses can secure predictable cash outflows, allowing for better financial planning and budgeting.

End of Lease Options

At the conclusion of the lease term an organisation can leverage highly flexible options to ensure it can optimise its operations.

Here are some of the options;

  • If you remain satisfied with your equipment you can continue with a renewed lease reflecting market vale of now aged equipment
  • If you are undecided on next steps at the conclusion of your lease you can roll on existing lease terms until you have decided
  • Upgrade equipment on a new lease
  • Exit the lease and will dispose of the equipment for you
  • Purchase the equipment

Equipping operations for Growth

Given the opportunity that is unlocked with an equipment leasing strategy here are some considerations to facilitate building operational capacity for growth;

  • Clarity: Prioritise your real time market opportunity based on projected ROI.  Don't let the endless data distract from  simple attainable goals that drive volume growth.
  • Operational Scalability: Adjust processes to handle increased sales and delivery volume for speed, accuracy and aftermarket service.
  • Talent and Skills: Allow for training and development to equip your team for increased momentum.
  • Supply Chain Readiness: Consider logistics, inventory management, and supplier relationships.
  • Technology Infrastructure: Prepare your IT systems to handle increased data, communication, and digital processes.
  • Customer Experience Enhancement: Consider how you will sustain excellent customer service and adapt to changing customer needs.
  • Risk Management:  Identify growth risks e.g., market volatility, regulatory changes.
  • Communication and Alignment:  Communicate the vision, strategy, and expectations clearly to all stakeholders.

As you reflect on your end-of-financial-year (EOFY) snapshot, consider the strategic advantages of transitioning from capital expenditures (CapEx) to operating expenses (OpEx) and how future-ready your operations are, ensuring scalability, talent readiness, and supply chain resilience.  It could be time to take your organisation to the next level.

 

 

Related articles and case studies…