22 October 2014. To repair or replace. That is the question. What is the answer? When your machinery breaks down, you need a fix, and many managers struggle with the decision to scrap what they have. How do you know what the better choice is? Here’s how.
Do You Have The Cash?
One of the first things to think about when considering replacing or repairing heavy machinery is the cost of each action. More specifically, what is your cash flow situation? Realise that fixing a used piece of equipment will put a much larger dent in your company’s bank account than financing something new.
Let’s say you have $100,000 in the bank. Let’s also assume that repairing your existing machines costs roughly $50,000 total. You’re down $50,000 in your company’s cash account.
Now, if you were to buy new, let’s assume that you’d pay double the cost of repair. So, let’s assume that you’d spend $100,000 total. But, $100,000 at 8 per cent interest for 15 years yields a monthly payment of just $955.65. That’s just $11,467.80 a year. It’s going to take just over 4 years to match the cost of fixing your existing machinery.
Put another way, if you plan on fixing or swapping out your equipment every four years, then buying new is a better option, even when the cost of new is double the cost of repairing what you have.
Are You Still Paying For The Machine?
If you’re still paying for what you have, however, you’ve got a couple of options. First, you can fix it. But, this is going to put additional strain on your finances. You’ll have a monthly payment and the cost of repairs.
Secondly, you can set aside your equipment and then rent something until you can afford to fix what you’ve got. Finally, you can sell the broken down piece of you-know-what and buy another working model.
It really comes down to the numbers. If it makes sense to sell, financially, sell it. If it makes sense to keep what you have, then keep it. So, for example, let’s say that - when it’s all said and done - it costs you just $20,000 to repair your equipment. If you’ve got some cash in the bank, and a lot of outstanding invoices, this might actually be your best option.
If you’re cash-strapped, however, you might not want to sell but you might be forced to to keep the doors open. It may not be a good long-term move but it might be your only move.
Manage Your Machines Like You Would A Rental Fleet
Think like a rental fleet manager. What does that mean? It means that you should take a really analytical view of your equipment, and develop a replacement cycle. For example, a common replacement cycle for a fleet manager might be 20 per cent of the fleet year-over-year. That will put about half of your fleet in the red and half in the black.
Does that sound awful? Consider this: if you don’t develop any schedule, you could very easily end up with all of your fleet in the red when it comes to maintenance and payback. Most heavy machinery doesn’t last more than 5 years without some kind of repair being necessary.
It’s better to cycle your machines on and off, rather than try to run them all at full-bore, which is never a long-term winning strategy.
The Life Cycle And Maintenance Costs
Hire an electrical engineer. Why? Because you’ll want to have a life cycle and maintenance schedule that is very precise, and an electrical engineer can be invaluable for that purpose. Even if you hire one seasonally or on a contract “as needed” basis, get one.
Over time, you may find that you need custom parts, custom repairs, and the cost of maintenance on ageing vehicles never goes down. An engineer can help you cut those costs and firm up a solid cycling plan.
Toby Crace is a part-time accountant who likes to help people save money. He likes to write about issues that directly impact workers and their managers, and then he posts them online.
