Home                 WMS                 Voice                 Solution-IV                 Shipping System                 Contact Us                 About Us  
Success Stories  Is Now The Time

 Associates Page

 Online Meeting

 Support

IS NOW THE TIME?

OK, so your holiday season shipments were off by 15%. You have seen your accounts receivables go from 35 days to 50 days.Inexplicably, 2 of your top 5 suppliers have increased their prices.

YOUR RESPONSE?

You have diligently implemented all the smart, belt-tightening measures: you have put a moratorium on overtime and hiring, cut out the frills and ‘extras’, selected some lower cost (and perhaps lower quality) alternatives in non-mission critical areas.Your Finance department is recasting 2009 projections to reflect the reduced volumes and prices in a no-bonus, no-raises scenario. In addition, you have prudently tabled all capital expenditure requests.

Wait, back up. The best response IS NOT always a resounding “NO” to capital investment during a recession. There are many reasons why this is a good time to invest wisely in certain types of projects. Moreover, some leasing alternatives could eliminate that onerous upfront capital investment in favor of a monthly positive cash flows and creation of alternative credit opportunities.And since credit is expected to tighten before it eases, NOW is the time to start reaping the benefits of investing in your business.

WHAT TYPE OF INVESTMENT PROJECT?

The diagram depicts the four basic types of investment opportunities that face your Company. They are delineated on two axes:

  • Risk Level – a composite index of unknowns, uncertainty and difficulty

  • Focus Level – a composite index of inward versus outward focus, and therefore level of control.

Two opportunities outside the realm of reinvesting in one’s own business are (1) No-risk financial instruments (CD’s, etc.) and (2) high-risk equity instruments. The turmoil in the equity markets has effectively reduced interest in the latter. Clearly, it is a rare organization that does not have internal opportunities more attractive than the risk free interest rates available to them. The table below describes the difference between the prior few years’ and current conditions.

Prior State

Current State

1.      “Easy” credit

·        Tighter underwriting

2.      Lower rates

·        Higher rates

3.      Healthy consumer spending

·        Reduced consumer demand

4.      Global equity liquidity

·        Low confidence in equity markets

5.      Consistently rising expectations

·        Recessionary mentality

6.      Favorable tax incentives

·        Tax program uncertainty

The shift to the current state has adversely affected Business’ ability and willingness to invest. Big ticket M&A deals, which traditionally had big risk/reward profiles, have effectively been eliminated from many companies’ sights due to credit tightening and stock market uncertainties. The long payback period that naturally accompanies new product development may just be unpalatable to your stakeholders at this moment.

WHY INFRASTRUCTURE IMPROVEMENTS AND WHY NOW?

What is meant by infrastructure improvements? They can run the gamut from business process reengineering, to new software and hardware solutions, to purchases of machinery and equipment. Infrastructure improvements frequently don’t get the same attention that surrounds a new acquisition or the latest marketing campaign. They just aren’t as sexy. However, they have many advantages that may be lacking from their more glitzy rivals, particularly in these troubled times.

  • Whether your organization is running at 70% or 105% capacity, a lower unit cost always improves the bottom line. These projects come in all dollar sizes.Frequently improvements can be implemented in phases, building upon existing platforms. The cumulative advantages can be significant.


  • Reduced dependence on labor can be a cost savings during tough times…but an absolute imperative during boom times, when a high quality and stable work force is scarce.


  • Returns that are based upon time, labor and material savings can be projected with much more accuracy and certainty than those dependent upon gaining market share or forecasting consumer preferences.


  • Meeting your customer’s demand for “better – faster – cheaper” goes a long way toward improving customer satisfaction and retention. This can be a significant positive differentiator during both demand-driven and supply-driven economies.


  • While the current economic situation has everyone feeling that they have to “do more with less”, lower volumes just may give your organization the breathing room it needs to implement a new solution.


  • There is a good chance that Congress will reinstate an economic stimulus package similar to that in place in 2008. The effect would be to reduce the total cost of ownership through accelerated tax deduction for capital projects, whether financed with cash, debt or capital lease.

Let’s say you have a well researched and well documented case for upgrading your warehouse management system or for installing a piece of robotic equipment. It is a near certainty that the project will pay for itself in less than two years through lower labor costs, improved quality and reduced inventory shrinkage. Yet, the scuttlebutt is that Senior Management is saying ‘No’ to any and all cash outlays.

Your Company, like many healthy and well run businesses, is hesitant to use their cash reserves or credit capacity to fund even moderate sized investments with short payback periods. Or they may be concerned that credit markets are closed to them, or that rates have increased. And as for leasing, your Company has just never had to go down that road.

CREDIT MARKETS AND LEASING

Contrary to sensationalist headlines, banks and other financial institutions are still lending. Companies are finding that they may need to provide more documentation or go through more stringent underwriting. And they may need to seek out the less-well known lender. However, credit-worthy businesses with good plans do have access to credit. Your Supplier should be able to introduce you to reputable lenders and lessors.

What many organizations are finding out is that leasing has become a more attractive alternative than it was in the past.  There are a number of lenders that specialize in software and computer hardware.  And due to software and hardware’s shorter useful life, they are particularly well suited to inclusion in an operating lease.  The table below compares the two types of leases.

Issue

Capital Lease

Operating Lease

Ownership of property

Lessee takes ownership

Lessor retains ownership

Payments

Somewhat higher monthly payments

Lower monthly payments

Income statement presentation

Imputed interest expense and normal depreciation expense

Lease payment is an operating expense

Tax benefit

Purchase price is eligible for Section 179 deduction consideration in the first year, along with any accelerated depreciation in effect

Payments are deductible in the year made

Balance sheet presentation

Leased item is booked as a fixed asset and obligation as a liability.  Could affect compliance with existing loan covenants and credit capacity

No asset and no liability is recorded, probable footnote disclosure. 

 

Under an operating lease, the Lessee takes advantage of lower monthly payments and no upfront cash outlays.  At lease-end, the Lessee determines if it wants to upgrade or buy out at current market prices, or walk away.

 

CONCLUSION

Smart companies continue to investigate reinvesting in their own infrastructure in order to improve their competitive position.  During these troubled economic times, such an investment is frequently the least risky, high-returning one a company can make.