SIX MUST-INCLUDE COSTS FOR YOUR RENT-OR-BUY CALCULATION
Is it time to add capacity for the working season? Does buying make sense? Or is renting a better option? As you run the numbers, make sure these costs are part of your rent-or-buy calculation.
1 | Cost of low utilization
Underutilized assets erode profitability, so don’t buy anything unless you’re fairly sure you can keep it on the job earning revenue most of the time. Industry experts say when the projected utilization rate for a new piece of equipment exceeds 65%, owning is usually preferred. But if utilization is expected to be less than 40%, think rental. If the rate falls somewhere in between, other factors need to be considered.
Here’s a basic process for calculating utilization:
1. Choose a time period—say 6 months.
2. Add up the number of full days you expect to be able to use the machine during that period. Convert partial days to full days.
3. Divide that number by the industry standard for full utilization (22 days per month).
4. Multiply the answer by 100 to arrive at the utilization rate.
Keep in mind, the telematics data from your existing fleet provides an objective view of current utilization. Use this information when possible to improve the accuracy of your calculation.
2 | Opportunity costs
As you contemplate rent-versus-buy, it’s important to consider how a purchase will affect your ability to fund other improvements to your business. That’s what opportunity costs are all about. If buying a new machine means you’ll have to postpone another critical investment—adding people, for example, or upgrading a customer-facing business system—it might be better to rent the asset and use the capital for other priorities.
3 | Maintenance and repair costs
With rental, it’s usually easier to manage maintenance and repair costs. These costs are typically factored into the rental payment, so there’s less risk of a budget surprise. The timing of maintenance and repairs can also be managed when you rent, so there’s less potential for a shutdown that impacts production. Just be sure you rent from a quality supplier—someone who can deliver a well-maintained machine when and where you need it and keep the unit running in top condition over the life of the agreement.
4 | Depreciation costs
When you own a machine, its value depreciates over time, making it more difficult to recover the cost of your initial investment. Although there are many strategies for managing depreciation, renting can be an effective way to avoid the losses associated with aging assets.
5 | Storage costs
Equipment that’s not stored properly, especially when the weather is harsh, can develop performance and reliability issues. It can also depreciate more rapidly. But storage space for the assets you own is expensive. If you rent a piece of equipment, you may not have to plan for or incur these costs.
6 | Logistics costs
The cost of moving assets from site to site can really add up. You pay for transportation, of course, but may also incur costs associated with downtime and lost production if you have to wait for equipment to be dropped off. Renting a machine—and arranging timely delivery to the site—can help you avoid these costs.
There’s a lot to consider when completing a rent-or-buy calculation. Your best bet is to work with a supplier who understands your business and can offer a full range of new, used and rental equipment options. Together you can explore all the costs, add up all the benefits and arrive at a decision that’s right for your situation.