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Fitting the Pieces Together: A Guide to Office Operations for the Liquid Waste, Portable Toilet & Septic Pumping Industries |
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As you can see, the price or cost of an item is more than just money. The following is a list of issues that should be included in the "cost table" that needs to be written down so that a dollar and cents business decision can be made.
Price This is the amount of money that is initially paid for the equipment
Usable life span. The length of time that the equipment will last with proper maintenance or the length of time before new equipment can do the same business functions at a lower cost. If a truck costs $50,000 and last five years, the cost is $10,000 per year.
Cost of money. The revenue the money would generate if placed in a bank. The $50,000 could have earned 10% in investments or $5,000 a year, no compounding, without having to drive it around.
Operational hours. This is the net difference between how long it takes to do the job with existing equipment vs. how long it takes to do the job using the new equipment. If new business functions are being done, you need to generate an estimate of how long it would have taken using existing methods. Most equipment purchases should result in a shorter time to do the work. This is called a cost savings. This savings helps offset the cost of the equipment.
Direct operational costs. These are costs that are directly associated with the utilization of the equipment and are in addition to the purchase price. You can recognize these costs in that they are directly linked to the new equipment/service. Other costs that have increased and cannot be separated are handled under the indirect or loaded costs. Below are typical categories of direct costs:
Financing
Utilities
Supplies
Training
Maintenance
Other direct costs, i.e., insurance, etc.
Loaded costs are those costs that need to be distributed across all equipment on a shared basis because it is not economical or possible to separate the costs out, i.e., garage rent for winter parking of trucks, etc. This "loaded rate" is in addition to the hourly labor rate you pay your self and/or or workers.
Now that you have all the costs, the question is whether buying the equipment has any benefits. We are going to look at dollar benefits specifically, but remember, do not forget about the other benefits, i.e., stress, quality of life and capacity to grow the business that are associated with any purchase.