4 Big Investments That Can Help Your Business Grow
It's never too early to start thinking about year-end tax planning and next year’s growth plans. If, like many small businesses, your company is doing better financially than in years past and your outlook is optimistic, this could be a good time to make some investments in your business before the end of the year.
Before making these decisions, however, it’s important to determine how valuable these big investments will be to your business, how it will affect your finances and how it will affect your business taxes. Here are some items that can deliver the most “bang for your buck.”
Technology is advancing exponentially. In general, a business computer has a three-year lifespan—typically how long manufacturers offer warranties for. Sometimes a computer can last as long as five years. But with more data to maintain and secure, more memory-intensive applications to run and more business tasks going online, computers are under heavy demands. If your company’s computers are starting to show their age, think about how much that’s costing you in lost time. Not only that, but weaknesses in your system due to outdated technology could put data at risk—and that could put your business at risk of fines or lawsuits from customers.
Almost every business has some type of specialized equipment necessary to operations, whether it’s a pizza oven for a restaurant or machinery for a manufacturer. If your equipment becomes outdated, requires frequent repairs or is no longer meeting safety or emission standards, it’s time to replace it. Even if your equipment is still functional, upgrading to newer equipment may enable you to boost productivity and sales.
Vehicles have made rapid advances in the past few years, with sophisticated safety features such as backup cameras, hands-free communication, built-in GPS systems and lane-change warning lights now standard on many models. If your business vehicles are showing their age, consider how newer vehicles with updated features could save money on insurance and maintenance. If your business involves lots of driving such as making deliveries or visiting distant customers, buying hybrid vehicles or other vehicles with good fuel economy may save you a lot of money.
Commercial Real Estate
You may know a business owner who’s been forced out of a good location by a drastic rent increase when his or her lease was up. You can eliminate this risk by purchasing your business’s building instead of leasing. Obviously, this is about the biggest investment you can make, but it can be worthwhile. Consider:
1. How would mortgage payments compare to your lease payments? In some cases, they may be less—plus, your costs are predictable, unlike lease increases.
2. How long do you expect to stay in this location? In general, if you plan to stay in the same building for seven years or more, buying will cost less overall than leasing.
3. Does the building have adequate space for future growth? If it’s too big for you now, you can always rent the empty space to other businesses until your business needs it.
4. Could you sell or lease the building when it’s paid off and you retire? If the building is very specialized to your business’s needs, this may be harder, but if it’s a building that can easily accommodate a variety of different businesses’ needs, you may see a profit.
Should You or Shouldn’t You?
In weighing all of these investments, there are several questions to ask:
1. Will it make you and your employees more productive?
2. Will it enable you to produce more products or serve more customers?
3. Will it cost less to operate than the existing asset?
4. Is it essential for planned expansion?
5. Is the lack of it holding your business back compared to your competition?
6. Is the cost of repairing or upgrading the item close to the cost of replacing it with a newer model?
7. How will the investment affect my taxes?
Buy or Lease
For any of the capital expenses mentioned above, you have the choice to buy or lease. In some situations, such as business equipment, leasing may make more sense. You don’t need a lot of money upfront, and at the end of the lease you can start a new lease with newer equipment so you always have the latest model.
Leasing almost always costs more than buying in the long run, so if it's an asset you plan on keeping for a long time and one that retains its value, buying may be the best bet. Keep in mind, buying ties up more money upfront. You’ll either need to have the down payment on hand, or take out an equipment loan to pay for it. Consider what else you could do with the money before you make the investment.
Ask the Expert
Talk to your accountant to determine the tax effects of the investment and whether to lease or buy. Your accountant can help you see how big investments will affect your cash flow, projected sales and operating costs going forward based on your industry and financial situation.