Today's Equipment Acquisitions Demand a Total Business Solution Provider
Vecker, Paul, The National Public Accountant
Today's accountants and controllers pride themselves on their expanding role as business advisors to their clientele. Their expertise and insights are shared in a wide range of financial, managerial and planning issues. Perhaps the one area which clients rely most on their accountant's advice is corporate finance. Accountants play a major role in a business' banking relationships, institutional investments, as well as cash flow and management systems. One area of finance that impacts all of these areas is equipment leasing.
Statistical Data/Growth and Development of Equipment Leasing
According to the Equipment Leasing Association's Survey of Industry Activity and Business Operations, currently, within the United States alone, equipment leasing and financing represents a $160 billion industry. The same survey reported that 33% of the participating Equipment Leasing Association members had added a total of $58 billion in new business (collectively) in 1995. That increase was the highest annual volume total recorded by the equipment leasing industry in two decades. If you isolate one segment of the equipment leasing market - computer leasing - the trend toward increased volume is still apparent. According to the U.S. Department of Commerce, International Trade Administration, and Equipment Leasing Association of America, in 1993, the industry's volume has grown to an estimated $25.7 billion in 1996, from $18.4 billion in 1993.
The point is, businesses are leasing equipment in high volume today, particularly within certain product categories. Computer systems (i.e., mainframes, peripherals, small systems and software), transportation assets, industrial manufacturing, construction equipment and office machinery are all being leased today in record numbers, both domestically and within their global marketplace.
What these companies already know is that equipment leasing is an effective tool for facilitating management's operational and fiscal requirements. What their accountant and controllers should focus on are all of the flexible options associated with equipment leasing and how each of these can be applied to best accommodate an individual client's requirement.
The Lease Versus Purchase Option
For many companies, the decision to acquire equipment comes down to a lease versus purchase analysis. Consider how a company's cash flow, equipment application and value is affected by a lease versus a purchase:
Generally, under terms of a lease, there is little or no upfront cash investment. In contrast, when a company purchases equipment, there is always a substantial upfront expenditure. This comes despite the fact that the business may be investing in equipment which will decrease in value and/or will not satisfy the company's needs over time. This is particularly true with high-tech systems, where rapidly changing technology can quickly render a system obsolete, not to mention place the company at a competitive disadvantage by lacking the latest performance enhancements.
Concurrent with the advent of new technology comes the decline in an older system's market value. It becomes a "no win" situation for the company who made the ill-fated purchase. The question then becomes: "Why invest and tie up significant dollars in equipment whose primary function, although valuable in that it helps the company work more efficiently, is not a part of its core revenue producing business?" This cash can be better utilized in supporting the business' day-to-day operations. With its lower monthly payments, leasing helps conserve capital and enables the lessee to pay only for that portion of the asset's useful life covered by the lease (i.e., 80% vs. the 100% incurred through a purchase arrangement). In addition, lease transactions can be structured so as to provide the company with off-balance sheet financing thus leaving its debt-to-equity ratio, current liabilities and credit lines unscathed. …