Money Talk: Major Equipment Purchasing, Part 1

Now look at Column B, with the $500,000 press purchased on the last day of the year. The new debt service has payments over 6 years of $90,000/year ($70,000 principle, $20,000 interest). Looking at next year’s projections, we now see a $25,000 loss. Depreciation increases $50,000, but interest increases by $20,000, and EBITDA is now $325,000. With increased principle and interest, and debt service now at $340,000, the question to be addressed is: Where are you going to find that money? You can’t count on sales alone to cover this. Analyzing and comparing your projected cash flow both pre and post-equipment purchase thus highlights why you should do a thorough economic justification for any new machine purchase consideration.

New vs. Used

When it’s time to shop the marketplace—again, be thorough. As we mentioned, there’s a glut of late model equipment out there at seemingly bargain prices and capabilities—but is that the right place to look for your particular needs?

• Talk to every reputable dealer whether you are considering new or used. Have each manufacturer educate you about their products. Be sure you totally understand the total cost of operation, including service contracts, cost of consumables, operator training programs, and environmental concerns. For example, some of the newer machines require special climate controlled rooms which add to the cost of installation, so be attentive with due diligence.
• Talk to other equipment users about their experiences, particularly those not referred by the vendor. Observe the equipment in operation, preferably at more than one location.
• For a used machine, ask about any warranties availability. We have seen some digital manufacturers charge as much as $25,000 to $30,000 for recertification, plus require agreements for consumables. There are a lot of costs involved in getting a machine up and running, so most printers who are successful in buying used digital equipment already have one or two of a particular manufacturers unit, and are looking to add capacity. A used machine can truly be a bargain if you are in a situation where you already buy a significant volume of consumables from a specific manufacturer, and are able to get some relief on the recertification. On the other hand, if you are a first time digital buyer, don’t underestimate the value of the manufacturer’s warranty and training support. It can counteract the sometimes hidden costs of used equipment purchasing.
• Explore a variety of scenarios such as how the increased efficiency of a new machine may possibly eliminate a shift and produce cost savings, or how the additional interest to be paid on a new machine will impact your cash flow.
• Throughout it all, keep your marketing plan and budget in mind as you shop. For every machine considered, ask yourself, “Does this machine meet my current and future needs? How does it fit into my operation as a whole? What savings can I reasonably expect to see from lower production costs and improved efficiencies? Is my cash flow sufficient to cover the expense? And most importantly, with all factors considered, can I really afford it at this time?”

Whatever equipment direction and purchase timing you choose, be sure it is done with full and careful consideration of your marketing plan goals as well as the costs and benefits of the purchase. Use the resources available to you in making your decision. Equipment vendors can be helpful in providing cost benefit information. An accountant knowledgeable in the printing industry can be invaluable in your financial evaluation. A well thought out marketing plan, coupled with a financial and operational pro forma projection which considers the implications from both a cost and production standpoint are both essential preliminary steps in making an educated equipment purchasing investment