When is the right time to make that next big purchase for your business? Depending on your type of business you may need to fork out on a new computer system, a new truck, office space, or undertake a major expansion project.
Sometimes these purchases are forced. For example, if your truck is beyond repair and simply must be replaced. Other times these purchases are made based on gut instinct.
In most cases, however, larger purchases are planned well in advance. But when is the right time to pull the trigger and make that investment, without compromising your cash flow? Here are six ways to gauge if the timing is right to make a large business purchase, and whether tax laws work in your favor.
Did you know that you can get a tax break on purchases made before your business has opened its doors or started generating income? While equipment purchases don’t qualify (instead these must be written off as depreciation), plan your investments carefully because you can deduct other purchases such as advertising and travel costs. The IRS defines “startup costs” as amounts paid for the following:
Read more about deducting start-up costs from the IRS.
Good accounting is a big factor in helping you determine when to make larger purchases.
The larger the purchase, the more time you’ll want to spend number-crunching. This process is known as “capital budgeting” or “investment appraisal” and can help you understand whether a larger project or purchase is worth pursuing based on the returns predicted. Capital budgeting is something you can do within most accounting software like QuickBooks, but get the advice of your accountant if you need to. They can help you navigate this process and ensure that you don’t overspend and focus on purchases that pose the least risk combined with the greatest payoff.
If you need funding for your purchase, you’ll need to put together some very-detailed numbers and a business plan. BizFilings offers useful insight on how to evaluate the costs or benefits of a major purchase.
Consider the impact that the purchase will have on revenues and cash flow. The cost of the initial purchase may lower your cash flow initially, but, in the long run, may result in more sales or operational cost-savings.
A cash flow statement can help you compare the costs and financial benefits of your purchase over a period of time, how it will affect your business, and help you determine whether you need a strategy to cover any short-term cash shortage – i.e. is the timing right to make the purchase? Again, if you need financing to support your purchase, the lender will insist on a cash flow projection.
Online accounting systems can help you prepare a cash flow statement. Alternatively, you can use an Excel template like the one offered here.
Delaying a purchase until the end of the month, quarter, or year can sometimes get you access to the best deals, especially for purchases like vehicles and inventory. Certain seasons are also conducive to better prices as sellers try to shift inventory during quieter periods. Economic slumps can also be a great time to buy – if your business remains strong.
The Section 179 deduction was specifically created to encourage capital asset purchases and allows businesses to deduct expenses for computers, furniture, certain business software, vehicles, manufacturing equipment, and more, over one year – instead of writing them off over their useful life.
Section 179 (which lets you expense the entire cost of equipment purchases in the year you bought them rather than depreciating the cost) will experience a whopping cut from $500,000 to $25,000 in 2015 if Congress fails to take action to extend the threshold. The good news is that if you purchased equipment in 2014 you can still claim up to the $500,000 threshold with your 2014 return.
Keep an eye on the Section179.org website for the latest updates and don’t forget to bear this important deduction in mind as you plan larger purchases and their timing.
According to Bank of America’s Small Business Owner Report (Fall 2013), only 35% of surveyed business owners described themselves as being “very savvy” with their business finances.
If you’re in the business of making larger purchases, you really should have an accountant on hand to assess your business’ financial health – income statements, cash flow, etc. – and help you determine any risk associated with making a large purchase.
For more tips on putting controls around the purchasing process, read: 10 Ways to Streamline your Business Purchases.