Lease Is More
This story appears in the January 1998 issue of Startups. Subscribe »
Short on capital but long on equipment needs? Consider leasing instead of buying. Leasing frees up capital because it eliminates the large cash outlays and down payments required when purchasing or financing equipment.
"The smart way to obtain equipment is to borrow capital from a bank because it costs less to repay the loan and you ultimately own the equipment," says Carl Evans, who, with his wife, Norma, owns and operates Santa Fe Printing, a full-service print shop in Santa Fe, New Mexico. Unfortunately, you might not have that option. Because the Evans didn't qualify for a bank loan when they needed $18,500 for a new printing press, they leased the new press at $550 per month for four years.
"Leasing is more expensive in the long run," says Carl. "You pay for use of the equipment; you pay for depreciation; you pay interest."
It may be your only choice, however. If so, negotiate every clause to get the best deal you can before you sign a lease, says Carl, a former PIP Printing franchisee. "Lease terms are not written in stone until you sign," he says. "Study the contract carefully to verify the term of the agreement, renewal options, equipment value, payment amounts, cancellation penalties and what happens to the equipment at the end of the lease."
Whatever you lease for your business is deductible as an operating expense (though an outright purchase may prove more beneficial, taxwise). Leasing makes it possible to acquire needed equipment--anything from copiers and office furniture to vehicles and heavy machinery--when you can't otherwise afford it, while keeping your balance sheet healthy.
Paul DeCeglie is a former staff reporter for Journal of Commerce and American Banker. He can be reached at MrWritePDC@aol.com
The Bottom Line
Now a word about your budget. Don't have one, you say? You are not alone. "Too many small-business owners operate without a budget, and therefore have no idea how well--or how poorly--their businesses are doing," says Cathryn L. Taylor, senior manager at Deloitte & Touche LLP, Chicago.
Case in point: Taylor's husband has been running a consulting business for seven years without a budget. "He feels he can't hire employees or plan other moves because he never knows how many hours he will be billing from month to month," Taylor says. "But with a budget, you can plan ahead, establish goals and, more important, measure your performance. How can you know how well your business is doing unless you have something to measure it against?"
Many small-business owners dread the perceived complexity and the drudgery of budgeting. In reality, however, creating a budget need not be a complicated or time-consuming task, particularly for a new business owner. In fact, Taylor advises keeping it simple in the beginning. "Don't get caught up in details that might discourage you from maintaining monthly financial reports," she says. "Instead, prepare a simple budget and develop the discipline of budgeting."
Where to start? Take two sheets of paper. Label one "Income" and the other "Expenses." On the first, list major revenue-producing categories and estimate minimum monthly amounts for each item for the next 12 months. Then do the same for "Expenses," listing primary outgoing items and estimating maximum monthly expenses for each.
"For the first year or two, keep the categories fairly broad," suggests Taylor. "Rather than 85 lines of detail, focus on key items that are driving revenues and expenses. If you sell women's clothing, for example, revenues might include four or five broad categories, distinguished by designer or manufacturer. Then categorize your expenses by store occupancy costs, production costs and labor."
Remember, a budget is a management tool that can help you control your expenses and measure your company's performance, but it's only a guideline. If your actual expenses exceed your budget, you have an opportunity to make up the difference by increasing sales or reducing other expenses.
The bottom line, according to Taylor, is this: "Business owners really need to prepare a budget because if they can't talk those numbers, they can't execute the performance."
The Price Is Right
As a start-up business, establishing appropriate prices is critical to your early success. If your prices are too high, sales will suffer and many potential customers will be alienated--perhaps permanently.
Pricing products or services too low--a temptation for many start-ups--not only impacts profits but also may preclude business from corporations and others seeking quality. Also, if your clientele is attracted by low introductory prices, what will become of that customer base once you adjust prices to market levels?
The solution? Many entrepreneurs study the market to determine what competitors charge for the same products and services. Then they set their prices somewhere in the middle range.
If yours is a specialty business or one that provides premium services--such as the upscale Best Friends Pet Resorts & Salons, you might want to take a tip from Dan Charleton, chief marketing officer for the Norwalk, Connecticut-based chain that began franchising last year.
"The first thing any pricing planner needs to do is gain a thorough understanding of who the customer is demographically," says Charleton. "If you don't know that, you can't understand who they are economically. For example, if you are starting a business, ask yourself these questions: Who are your likely competitors? What is their customer base?"
"Costs are secondary in establishing prices," adds Charleton, who has applied the same principles in establishing retail pricing for TCBY Treats, Acapulco Restaurants Inc., Denny's Inc. and Wendy's International Inc. during management stints with each chain. "Your primary consideration is the volume that can be [generated] from a satisfied customer at a given price. You must understand what the market will bear for your product or service. Do a thorough job of analyzing who the customers are, what their expectations are and how price fits into their perception of value. And recognize that price selection is relative and constantly changing."
Bogus Bills
Just because you're responsible for paying bills doesn't mean you should pay every bill. Many small businesses have received invoices from bogus companies that have provided them with neither goods nor services. Just invoices. But many preoccupied entrepreneurs pay promptly without ever realizing they've been scammed.
While some perpetrators of such scams simply do widespread mailings, hoping a percentage of inattentive businesspeople will remit payments, others are more sophisticated. They might send an invoice replicating that of a major utility company or office supply store. Check each bill carefully to ensure it's genuine.
Other scam artists go even further. Their legitimate-looking invoices include the name of an employee who is supposed to have authorized the purchase. They may call and ask for help completing an existing order, claiming they "lost the name of the person we should send these cleaning supplies to."
Often, criminals ship merchandise one week and an invoice a week later. The two rarely arrive together for two reasons: the price charged for the merchandise is often inflated as much as tenfold (less obvious if the invoice arrives after the merchandise has been put away) and it's likely the victim will have opened the package and used the contents before the invoice arrives.
Contact Sources
Best Friends Pet Care Inc., 520 Main Ave., Norwalk, CT 06851, http://www.bestfriends.net
Deloitte & Touche LLP, 180 N. Stetson Ave., Chicago, IL 60601, (312) 946-2084
Santa Fe Printing, (505) 982-8111, print@santafeprinting.com
