To buy or leasethat's the question

ACED with the need to replace or update aging delivery equipment, many managers for the first time are making decisions affected by the Tax Reform Act of 1986.

Many effects of this law are just now being realized. One important area is capital equipment acquisition. \ow, more than ever, the question ii:. should businesses buy or ldrhse?

Buying new equipment improves efficiency and ultimately increases productivity and profits, buying ties up capital. One way to conserve capital while still adding new equipment is leasing.

The Tax Reform Act of 1986 eliminated traditional investrnent tax credits for new equipment and introduced the Alternative Minimum Tax (AMT). This has a major impact on how many companies deal with equipment ownership and leasing. Some are finding it more expensive to own equipment because ownership increases theirtax liability. However, many new types of leases

Delivery Quiz

(Continued from page 13 ) answered YES to all of the questions. Later, when delivery audits were made of the individual operating units of the respondents, it was determined that changing every NO answer to a YES had substantial effect in reducing costs of the operation. The retailers evaluated were small chains and independents. The largest single retail outlet was in the $30,000,000 volume range and the smallest was just under one million. All were profitable and belonged to at least one structured buying group. About half were familv owned. The have become available to provide use of equipment without outright purchasing.

A number of new financial options are available. Flexible leasing agreements allow companies to use the latest equipment while conserving cash and obtaining tax benefits.

Companies often choose to lease for:

Leasing offers tax advantages through acceleration of deductions, investment tax creditsand asset writedowns.

Leasing conserves capital, eliminating cash outlays.

Leasing may generate replacement of equipment to maintain productivity.

Leasing aids forepasting operational costs.

It is important for businesses to understand the different types of leases in order to maximize the advantages. Basically there are two types of leases: an operating lease and a capital lease.

Storyat a Glance

Ways to take advantage of the Tax Reform Act in replacing delivery equipment... buy/lease options. .. benefits of each.

An operating lease is typically a conventional rental contract. The lessee pays a flat fee for the use of the equipment. After the lease expires, the lessee returns the equipment to the lessor.

The capital lease is used by companies wanting to own the equipment at the end of the financial, con- others were closely held corporations.

As the audits unfolded, the average identified benefits per outlet were just under $151,000. Individual retailer savings ranged from $26,000 to nearly $350,000. The exercise of changing five ('NO" answers to "YES" produced an average benefit ofjust over $30,000 each. A savings of $151,000 at pre-tax profit of 2010 is the equivalent of $7,550,000 in sales just for managing delivery. No effort has been made, beyond what has been described here, to prove or validate these conclusions statistically through correlation measurement. However, since the test group was studied, the succeeding five years of auditing of other retailers has followed the same patterns. But even if the information is only half right, it means that $3,774,000 in sales and substantial savings can be obtained.

By now you should have reached two conclusions. F'irst, delivery is'a business unto itself, worthy of its own business plan with the problem identification, solution explanation and monitoring required to run any other business. Second, you should have multiplied your NO answers by $30,000 and divided that figure by your last year's pre-tax profit percentage. If so, you've probably discovered that one of the most profitable things you can do now, or almost any other time for your company, is to manage delivery.

January 1990 tract. Unlike a "borrow-to-buy" agreement, which requires a sizable down payment, a capital lease usually has a lump sum payment at the end of the lease.

The five most popular types of capital leasing options are: purchase option, $ I buy-out, balloon, skip payment and accelerated payment.

The accompanying chart provides an overview of each type of leasing agreement and how it can help solve specific problems.

Whether a company has one, or 100 pieces of equipment, managers

Transportation Special lssue

Spring Tool Promotion

should carefully consider whether to buy or lease the next one.

The decision depends upon each individual situation. Although the trend is toward leasing, a company must consult with its accountants and dealer for the right financial plan and equipment. Ultimately, the most successful companies in the 1990s will be the ones that use their capital most effectively.

Leasing Options Worksheet

This chart orovidcs an overview of tyDical business sltuations and the benetl(s cach leasing option ()ffers.

Situation:

Want to maximize cash tlow. May want to upgrade equipment later.

Looking to purchase, but seeking alternative fi nancing.

Looking to purchase but want low monthly payments.

Seasonal operation creates "feast or famine" cash flow.

Looking to maintain consistent level of cash flow to cover equipment and maintenance for long-term.

Solution:

Benefits:

Purchase Option Lease Low monthly payments. Option available to purchase equipment at pre-designated price, or can change equipment.

$l Buy-out Lease Provides alternative source of financing. Equipment is bought for Sl at end of lease.

Balloon Lease Determined Value Lease Provides lower monthly payment with a higher prearranged guaranteed purchase price at end of lease.

Skip Payment Lease Payments are made during busy season when there is strong cash flow, no payments due during "off-season".

Accelerated Payment Program Lease

Not looking to own equipment. Operating Lease (True rental)

Decreasing payments allow principal balance to be paid faster. Actual operating costs are keot stable.

Expense monthly payments as operatrng costs, pre-tax expense. Not showing ownership of equip ment on books.

Source: Hyster Company

Stanley Tools is teaming with Weyerhaeuser in a spring "instant win sweepstakes" promotion offering 3,000 prizes of tools and lumber worth nearly $150,000.

Consumers must go to retailers to see if the Match To Win symbol on their insert in Time, Newsweek, Sports Illustrated, The Family Ha ndyman and The Homeowner magazines corresponds to a winning symbol on Stanley displays.

Fibreboard Redwood Donatkrn

Fibreboard Corp., Concord, Ca., has conveyed 2, I 57 acres of redwOod timberlands to the Save-the-Redwoods League for addition to Fort Ross State Historic Park on the California coast.

Fibreboard sold I ,075 acres of the $6 million property to the group for $3 million cash and donated the other half of the land.

Spotted Owls "Everywhere"

A new Timber Association of California study revealed northern spotted owls thrive in a varietY of habitats, not just in old growth timbers as preservationists and the US Fish & Wildlife Service allege.

The wildlife biologists who conducted the timberland surveY concluded the bird should not be listed as an endangered species since "we found owls literally everywhere we looked."