As businesses continue to face economic uncertainty, rising costs and tighter credit standards, many are revisiting their capital spending budgets and prioritizing purchases to weather the storm. Before approving a new loan or a credit-line increase, consider whether borrowers have considered these cost-saving alternatives.
Creative solutions
Certain discretionary purchases — such as software upgrades and leasehold improvements — can be temporarily delayed until conditions improve. But for other capital expenditure (“capex”) decisions, companies are devising creative alternatives, such as:
Swapping fixed for variable costs
Businesses with low fixed assets are better positioned to survive economic downturns. Rather than build new factories or purchase new equipment — which incurs fixed costs — many companies might be better off outsourcing, because costs typically vary with production levels or service usage. Equipment leases also may offer lower payments compared with traditional asset ownership.
Going lean with inventory
Companies that reduce the amount of capital tied up in inventory free up cash for capex. Excessive inventory levels also add hidden costs, such as breakage, obsolescence, storage, insurance and interest. Lean (or just-in-time) manufacturing strives for continuous improvements in operating efficiency, including minimal inventory levels.
Rearrange workflow and storage
Some companies prematurely add new equipment or facilities. Instead, they could have freed up space and used the equipment they already have simply by adjusting the workflow among workers and machines. Similarly, businesses can minimize capex by repairing equipment rather than replacing it, especially if it’s under warranty or a maintenance contract. Fixed asset lists can identify idle assets and track warranty status.
Centralizing equipment purchases
Rather than allow each department to make separate purchases, a centralized procurement department can save money. Not only can the procurement manager negotiate bulk discounts, but he or she also can strategically schedule shopping at month- or year-end, when vendors are most likely to cut prices. Purchasing the same make and model of, say, laptops also facilitates in-house maintenance, training and interdepartmental equipment sharing.