Risk Management

In these uncertain times, risk management is more critical than ever.  We often focus on the risk of over-reaching:  What will happen if I expand now?  Should I wait until things begin to pick up before I purchase new equipment?  Will I gain more market share or will my income remain the same?  What if I buy new equipment and the market stays flat?  How will I pay for the new equipment?  These are very important questions to ask when evaluating the risk of expansion or purchasing new equipment, but if we are going to take a complete look at risk, there are a few more questions to ask.  If I put off my plans to expand, will I still have the same opportunities?  Is my competition planning to expand right now?  Will they expand and take some of my customers?  How will this loss of business affect my future?

Risk Verses Reward

Overreach and you risk adding to your troubles, under achieve and you risk being left behind in a super competitive marketplace.  Make the right choice and good things happen, make the wrong choice and a bad dream becomes a nightmare.  These are the choices we face in business everyday.  Is there a third choice - one that allows you to expand my business and minimize your risk?  Yes there is - leasing allows you to expand your business by adding new equipment and minimize the risk by breaking the purchase price down into manageable monthly payments.  Payments that won't put a strain on your cash flow but will allow you to purchase equipment you need to expand your income.

Here is a typical example.  Because his market is changing, John's Custom Cabinets needs to add customized embellished and carved doors to his custom cabinet line.  If he hires a new carver he has to budget for another salary, benefits, insurance and other overhead.  If things get slow and John lays his new employee off for a few months he has to face higher cost for unemployment insurance.  This could all add up to $30,000.00 to $50,000.00 a year in additional expense even when his carver isn't working.  Sounds like a high risk solution to the problem of expansion so John looks for a better answer.

John considers a CNC router/carving/turning system as a solution to his problem.  He chooses a CNC system that will add carving and turning capabilities to his shop can embellish his cabinet doors plus he no longer needs to outsource the turnings he uses on his custom cabinets.  This choice will give him two ways to offset the cost of his expansion plans.  The CNC system doesn't require John to hire a highly skilled, expensive employee with benefits yet he will get journeyman skill every time the CNC system carves a door panel or turns a spindle.  This will solve most of John's problems and that's the good news but this new CNC will cost him about $22,000.00.  That's still about half the yearly cost of a new employee so the CNC solution has an advantage already.  His equipment cost is a one time expense and the employee expense goes on and on and on.  Is there a way to further reduce John's risk?

John considers an equipment lease.  Besides avoiding the pain of writing a check for $22,000.00 he has discovered that a lease has several other benefits.  An equipment lease has the following advantages:

1. Conserves Working Capital: With an equipment lease John can finance 100% of the equipment he needs to expand his business.  Even though John has some cash put aside for a rainy day, a lease will allow him to keep that cash until it's needed.  His local bank wants a down payment before they will make him a loan and there goes his rainy day fund.
2. Better Terms:  Most equipment will use the equipment you are adding to your shop as collateral while most bank loans will require additional collateral, like your existing shop equipment or your house before they will make a loan.  A lease can keep your existing equipment and property free from liens.
3. Off Balance Sheet Financing:  John's accountant explained that ordinary operating leases do not show up as a liability or as an asset on his balance sheet so future expansion plans would not be upset by adding his new equipment to his shop now.
4. Tax Advantages:  Operating leases are generally treated as a monthly expense so John's accountant treats each payment as a simple monthly expense.  There will be no need for complicated depreciation schedules and yearend tax calculations, saving money every year for tax preparation.
5. Keeping Equipment up-to-date:  By leasing his new equipment, John isn't tied down to outdated or under-sized equipment.  As John's business grows during the terms of his lease he has the ability to upgrade the equipment and/or software if necessary.

Because John has been in business for more than two years and has a good credit score he qualified for a 48 month lease with a monthly payment of $545.00 per month.  Over the terms of the lease he will pay $86.00 each month in interest, a small price to pay to even further minimize his risk.  His new equipment only has to work a few hours each week to earn him enough to make his monthly payment.  Every additional hour that his CNC system works goes directly to his bottom line.  His investment insures that now he can offer his customers the choices they want and that will help him find new customers.

John has avoided both the risk of over-reaching and the risk of under achieving by making a very safe investment of only $545 per month.Because John chose to work with Legacy Woodworking Machinery he also avoided another risk, the risk of buying too small now and paying a heavy price later. Legacy’s trade up program allowed him begin his expansion with a mid-range CNC system knowing that as his business grew he could trade-up to a larger and more productive model.

$219.00 / Month
The numbers used in this example are based on a mid-range 5-Axis Hybrid CNC.  Legacy builds a full range of large 3-axis CNC systems that start at around $12,000 as well as smaller 5-Axis Hybrid CNC systems that start at around $8,000.  The payment on a $10,000 lease over 60 months is only $219.00 a month.  Legacy's Trade-up program allows you to start small and grow large.

If you find yourself, like John, facing the choice between the risk of doing nothing while your competition you in the dust and the risk of over-reaching and becoming a slave to your new equipment then please call one of our helpful salesmen for a consultation. With many models to choose from and several leasing companies to work with we can help you minimize your risk and maximize your reward.

Andy Anderson
President Legacy Woodworking Machinery