Do You Have an Equipment Replacement Plan?

Knowing when to expect to replace your trucks and other equipment helps you survive unexpected breakdowns and emergency replacement expenses

Do You Have an Equipment Replacement Plan?

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If you were in business 10 years ago, recall what that business looked like. What was your equipment situation? Did you have less equipment? Different equipment?

If your equipment changes in the last 10 years were forced rather than planned, the result may have been financial stress. If you’re new to this business, starting or taking control of a company in the last 10 years, and you haven’t created an equipment plan yet, the foundation of your business may not be as solid as you’d like. It was true 10 years ago and it’s true now: Businesses that replace equipment only on an emergency basis or purchase new equipment only when a tax deduction is needed are likely to experience cash flow problems. While equipment emergencies can’t always be prevented, if you’re prepared, you can survive them.

Envision your business in 2029. Is it a larger company with more vehicles and more equipment? Are the trucks shiny and new or showing their age? Whether you plan to grow or simply maintain your present level of business, equipment replacement is in your future, so be smart and plan for it.

Come up with a plan

Since every business is different, there’s no “one-size-fits-all” plan or schedule for replacing capital equipment. To make an equipment replacement cost plan for your specific company, create a spreadsheet listing of all the major equipment you currently own. In the columns to the right of this list, record the following information.

Column A – Estimated age: How old is this piece of equipment?

Column B – Useful life: How long (total) should this piece of equipment last? If you’re not sure, contact the manufacturer.

Column C – Remaining useful life: Subtract the estimated age (Column A) from the useful life (Column B) to get the remaining useful life.

Column D – Replacement cost: How much would it cost to replace this piece of equipment at today’s price? Consult with equipment suppliers, dealers or manufacturers for estimates.

Column E – Annual cost: Divide Column D (the replacement cost) by Column C (remaining useful life). This is the amount you’ll have to set aside each year to replace the item when the time comes.

Column F – Annual expense: If Column C (remaining useful life) is zero but the item is still in use and there are no immediate plans to replace it, record the cost of maintaining it. If maintaining it is costing more than replacing it would, it might be time to say goodbye.

Use the plan to time purchases

The plan can help you time business growth. It will show when you will need to invest in replacement equipment and if there are windows of time when no major purchases are necessary. These are good times to add equipment without messing up cash flow too much.

For example, if the plan shows two trucks should be looked at for replacement in 2020, you might be stressing your finances too much to add another truck that year. If there is a year when you won’t be expecting many equipment purchases, a truck may be added more easily then.

Review and revise often

An equipment replacement cost plan isn’t carved in stone. You’ll want to review it and revise it often, adding new purchases, deleting items that were replaced, and adjusting replacement cost numbers as prices fluctuate.

Things happen. Some equipment breaks before its time, while other pieces keep going long after their predicted demise. Prices change, needs change, and subsequently the plan will change, but it is always a valuable tool. Alter your strategic plan if there is a justifiable need. You probably won’t always adhere strictly to the replacement schedule. There is a human factor in the equation too. If you aren’t happy with something, don’t force yourself to keep it just because it’s on the plan for five more years — amend the plan.

When a vehicle or piece of equipment shows up for review toward the end of its scheduled life as determined by the plan, evaluate how it has been performing. Compare the cost of continuing to maintain it with the average maintenance cost for similar vehicles or equipment. Also include an evaluation of appearance. Older equipment might perform fine, but you might not want your company name on something that looks like it belongs in the junkyard.

After this review, determine whether to hold onto the item in question or send it off to auction. If it is performing well and still looks good, you may choose to extend its useful life and earn more interest on the money earmarked to buy its replacement.

You might want to add a column to your plan for either the profit or cost of replacing old items. Disposing of some used equipment — computers for example — might cost you a fee, which adds to the replacement price tag. Money taken in by selling a used truck, however, offsets the purchase price of a replacement.

The replacement plan is a snapshot of where you will be equipmentwise in 10 to 20 years — not just a vague mental picture. Show it to your accountant and discuss budgeting to meet expenses outlined in the plan and use it to determine if adding equipment to grow your business is financially feasible.

Create an equipment fund

Equipment replacement should be planned and budgeted to minimize surprises. If possible, establish an equipment fund that you can draw on for scheduled equipment purchases or in an emergency. Creating the equipment plan can help you decide how much you need to have in that fund. A plan and a fund are also helpful if you need to secure financing for equipment purchases. It looks good to lenders if you can demonstrate how much capital is required to finance the replacement of equipment for the next 10 or 20 years.

While you’re putting so much time and effort into running your business, getting through each single day can be a challenge. A decade seems like an enormous stretch of time. But before you know it, you’ll look at the calendar and realize 10 busy seasons have passed. Having an equipment plan can make those years go by more profitably.


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