Industry has been grappling with the balance between innovation through new technology and the budgetary constraints imposed by cash flow and future uncertainty throughout the ages. And while firms can be forgiven for feeling like today’s pace of change is hard to keep up with, it is important to maintain some perspective and not get caught up in the short-term furore. In the same way that scholars argue that the washing machine has had more social impact than the internet, standing back and putting technological change into context provides objectivity. Only this way, can a business make more confident investment decisions.
Yes, technology for personal use feels like it is constantly pushing boundaries – as cloud-based software and the related advances in mobile technology continues to shake up the social fabric of global society. But there is a generational tendency to overstate the impacts of the existing technology at any given time. Author Douglas Adams famously said “Technology is a word that describes something that doesn’t work yet”. The future, by definition, is always uncertain. Thus, the reality for most small to medium-sized manufacturing firms is that the most impactful technological advances are to be found in mission-critical commercial equipment – equipment that enables a food manufacturing firm to respond to rapidly evolving consumer demands or a material handler to cut back on its carbon footprint.
Developments like AI and intelligent automation can certainly offer the efficiencies that provide firms with significant competitive edge. And like an outdated mobile device, doing nothing will likely mean that current systems will become outdated, which can end up bringing a business to its knees. Yet with uncertainties such as the overhang of Brexit and the threat of a global economic slowdown forever looming, the chances are that your capital expenditure (CAPEX) budget is being put under increasing pressure. Thus, the big question is, how can your company keep at the cutting edge without stretching the budget too tightly?
The importance of life cycle management
The advantages from using new equipment offers the potential for greater efficiencies, and even increased revenues for a company. But to keep the pace, the first course of action is to develop a plan. The starting point of any plan should probably start with life cycle management.
Ultimately, the aim of life cycle management is to create opportunity and increase revenues by building in efficiencies to processes. But there are also important environmental considerations such as cutting back on wastage – an area that is becoming increasingly important to the consumer (even if regulation currently lags a little). Thus, pre-empting such considerations make a business less likely to be caught out by burdensome knee-jerk responses to regulation.
Start with grouping assets that your company holds into categories. You can then start to determine the optimal life cycle based on your company’s usage of the assets. From here, it will be possible to develop a plan to acquire, finance, manage and dispose of each asset class. To be effective, the plan should be a collaboration between the different functions of your organisation. This is also when it might be worthwhile engaging external experts – companies that have an in depth knowledge of the various aspects of life cycle management, including:
- The new equipment and technology on the market
- The secondary market values of a new technology
- Possible finance strategies
- Planning end of life disposition strategies
- Setting a plan in motion for each category of asset, including an annual review
With the above in mind, one crucial question that most businesses then have to ask themselves is how to balance capital allocation in new technologies with the potentially rapid pace of asset depreciation on those technologies. Perhaps one of the bigger questions is, does your company really have to tie long-term capital down to depreciating assets? Or is there a way to find a better return on capital than through CAPEX? Refrain from just turning to the most obvious solution – being the banks – which offer an abundance of financial engineering, as it could be that the answer for your company is far simpler and more financially efficient.
The alternatives to intensive capital outlay
Whether you are a university seeking to invest in new laboratory equipment, or a manufacturer deciding whether to maintain old or invest in more disruptive technologies, as a particular asset depreciates rapidly you will likely want to avoid messy end of life situations involving maintenance and disposal.
There are options where you can pay for what you use, rather than making a (potentially crippling) full-scale upfront investment. One answer could be a competitive rental structure for your company’s shorter-term needs, or a lease that stretches over longer term. Such financing options could be the financial backbone that powers your life cycle management plan across each asset category. Simple monthly payments in a defined life cycle, which reduce maintenance expenses and operational downtime, while increasing your ability to access newer, more disruptive technologies, mean that you can avoid the heavy capital outlay of outright ownership – while maintaining a nimble, future-proof business strategy.
In addition, a good leasing provider can often add significant value beyond just equipment financing. Working with a leasing partner helps many companies really understand that competitive financing is only part of the solution. True value can be found in a leasing partner’s experience of making markets in the assets you count on, which can help you devise and drive your strategy. They should be able to help a business establish and move towards its short-term technology needs, establish long-term company-wide assets, be flexible with location management, and even extend strategy beyond international borders.
At Somerset, our equipment knowledge drives better, more flexible financial solutions for our customers. In short, we offer a smarter approach to equipment finance. In our experience, deploying the right technology assets to keep your business at the competitive edge goes way beyond finance, and calls for a strategic partnership that helps put the future in perspective.