In my experience, Australians like to own things. Homes, cars, televisions – you name it and we want to own it. These examples are consumer based, not business, but many people I talk to take the same approach in business as they do at home. The thing is, we don’t operate in a one size fits all society, which means that owning it isn’t always the right way to go.
So what rule of thumb should businesses use when deciding whether to buy or lease their much needed equipment? US oil baron J. Paul Getty is credited with coining the phrase: if it appreciates buy it, if it depreciates lease it. While the phrase was created many years ago, its applicability is still very much alive and well today. In fact, given current economic conditions and the tightening of capital budgets, it may even be possible to argue that the phrase is more relevant today than when Mr. Getty first used it.
So let’s consider the type of items that appreciate vs. those that depreciate. At the simplest level, items such as real estate and art fall into the appreciation bucket, whereas equipment such as IT&T, manufacturing assets, office furniture and agricultural equipment all fall into the depreciating bucket.
Bearing that in mind, let’s now consider a range of outcomes that may be important to a business and whether or not those outcomes can be achieved by buying and leasing:
|Off balance sheet treatment*||X||√|
|Flexibility to add or upgrade assets||X||√|
|Avoid technology obsolescence||X||√|
|Improved cash flow||X||√|
|Ability to bundle soft costs||√||√|
*Possible when utilising an appropriately structured operating lease.
The table above clearly demonstrates that the one thing buying equipment offers that leasing generally doesn’t is ownership. That said, depending on the way a lease is structured you may be able to purchase the equipment at the end of the term if you wish.
On the other hand, a lease offers a range of benefits that can add significant value to a business, and which can’t be achieved via outright purchase. The most pertinent of which is the ability to keep up to date with changing technologies.
Other benefits worth noting are the ability to finance 100% of the cost of the equipment, thus minimising upfront capital outlay and simplifying budgeting due to set payments across the life of the lease.
I should note that the point of this topic isn’t to tell managers that leasing is the right approach to running their operation. I said at the outset that we don’t operate in a one size fits all society and as such, every business must determine the right approach to equipment acquisition for them.
I do however hope that this discussion opens people’s minds to approaches other than buying and owning. As you set about preparing for next year and trying to squeeze all of your equipment needs into your capital budget, take a moment to consider J. Paul Getty’s perspective.
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