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When To Invest In Equipment

Copyright Thomas P. Crouser, December 10, 1995 Crouser & Associates - Helping Printers Prosper Since 1985

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I can t say enough about Working Capital and Current Ratios. And, you might be getting tired of hearing about it. However, here s one message from someone who took it to heart. Let him tell you his story.

Subj: Ratios
To: TomCrouser


Hi Tom,

After asking you about ratios and saying I was going to do as you suggest and put all purchases on hold, I thought you might like to see our current ratios and my comments.

Current Assets to Current Liabilities: 1.6:1
Three months ago when I first E-mailed you after your comments recommending the company in Quick Printing stop buying--our ratio was about .8:1. So IT IS possible to bring it up. My goal is to reach 2:1 in another three months.

Growth over last year: 9%
Compared to this years budget: Budget: 7%


Cost of Services: 30%
I have recently raised prices so we will see if this figure begins to change. Off the record...my prices are now anywhere from 2%-10% higher than our franchisors company stores but about average according to the NAQP study, so will be interesting to see how it works out.

Salaries (excluding mine): 19%


Fixed Expenses: 30%
Here, too, I don t see much I can do other that going back to Assets:Liabilities. If I stop buying so much on leases, the lease line will obviously go down, or not buying so much on loans and the interest will go down or just not buying so much period! will keep office expenses, etc., down. This is the tough one, because I don t want to get behind in keeping current with technology, etc....

Owners Compensation: 21%

Thanks for the continuing good advice.

Tom s Comments:

This printer is on the way to hassle free management (the hassle is having a lack of cash) and is to be applauded for his progress. However, there might be a detour in the future. He wrote about overhead expenses: This is the tough one, because I don t want to get behind in keeping current with technology, etc.... Well, when does a printer know when to invest in equipment? And how much?

With a 30% cost of overhead - - - - > I assume we previously have built a box bigger than which is needed. In short, a $500,000 box filled with $300,000 of sales will guarantee a loss. In this case, it appears the halt in buying stuff is allowing the sales increase to begin catching up to expense commitments made earlier. Given some time, the 30% overhead will be going down as a percentage of sales (the box will begin filling up). In addition, stopping the spending or commitment of future sales to pay for current stuff, the owner s earnings of 21% will increase even further. But, will this knowledge keep the owner s pen finger off of new equipment leases down at the trade show or will he sign up for more debt in pursuit of progress? My guess is this is not enough information for save him from getting into the same fix again.

He learned earlier that the ability to pay our bills has little to do with the amount or percent of money we earn. It has everything to do with the commitments we have placed on the money we have on hand (our current assets). Current assets = assets which will turn into cash within the accounting cycle (12 months) including cash, accounts receivable, and inventory. When this is compared to the current liabilities (items REQUIRING cash within the next 12 months such as accounts payable, taxes payable, and the current portion of notes payable), a ratio can be developed. Our Current Assets divided by Current Liabilities should equal a ratio of 2.0 or better. This the printer now owns this concept and is working toward it.

However, he doesn t have the next piece of the puzzle: where we get the money to buy the equipment to keep competitive. Here s the answer. We increase our current ratio to more than 2.0. Then the portion above 2.0 is available for spending on equipment; buying a bigger house; putting away for retirement; expanding the business; educating the kids; or doing whatever else you want to do. Fact is, once a 2.0 ratio is attained, the owner can withdraw all the excess without doing damage to the asset.

I saw more than one printer this year doing it poorly. They weren t making money doing what they were doing; they didn t have any money on hand (poor current ratio); and their solution was to buy something. That is the business equivalent of investing at the dog track. Sometimes it works, but more often than not, it leads to disaster.

So, to alievate our printer s concern and keep him on the straight and narrow, the way one stays current with technology is to maintain a strong current ratio first. Then invest the excess into new technology as it becomes apparent. Don t bet new technology will provide you the income to improve your current ratio. By the time that happens, you will find more new technology to spend your current assets upon and always remain poor.

Tom Crouser

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More Buying Equipment

Transmitted from Jacksonville, Florida


One writer objected to my financial view of buying equipment. I recently wrote:
 . . . . where we get the money to buy the equipment to keep competitive.
Here s the answer. We increase our current ratio to more than 2.0. Then the portion above 2.0 is available for spending on equipment; buying a bigger house; putting away for retirement; expanding the business; educating the kids; or doing whatever else you want to do. Fact is, once a 2.0 ratio is attained, the owner can withdraw all the excess without doing damage to the asset.

Our reader wrote:
Tom, I agree with your quick ratio concept entirely, BUT, buying equipment has more to do with identifying opportunity (and then going for it) than it does about going to the dog track. Many cash starved printers would do well with this example.

My local Kinko s moved across town last December. Now my business sells printing and also many of the products that Kinko s sells, excepting color copies. Opportunity!

But how we handle the entry into this opportunity is extremely important. Knowing that I can sell color copies to many of Kinko s old customers on this side of town means that I should go buy a color copier. So do you spend $45000 for a new copier......or $8000 for a good used copier. Do you spend $900 a month for 5 years or $250 a month for 3 years?
Reading your comments, if I was cash starved I wouldn t buy either....instead I would wait until my under performing company somehow generates enough sales to move my cash starved position into a good A/L ratio.


Tom: My experience is the company, if cash starved, should buy neither a new machine nor an old machine. The owner should determine why they are cash starved and then they should fix it. Fixing it rarely, if ever, involves buying equipment. Once the cash position is fixed, the writer can take advantage of market opportunities. But, not until then. The discussion of either buying a new copier or a used one is immaterial at this time even if it s a great opportunity (and the writer makes a good case for buying used). The writer is not advocating investment. The writer is advocating gambling what is left of the firm s working capital on the bet it will fix his other problems. In short, this is a dog track gamble of the first degree.

Reader: My experience is that buying a used color copier for $8,000 (and making a payment of $250 month) has earned an additional $24000 in sales for me. Let me restate that. I have a NEW income source that brings an additional sales of $24000 and a monthly profit (after service, ink and paper) $1400. That means that my A/L ratio is out of whack for the first 2 months, assuming that I just bank the cash. Another thought, this equipment is earning a 67% return on investment with the potential to go even higher.

Tom: Just because the gamble the writer took worked this time, doesn t mean it was a prudent risk. Someone will win on the first race at the dog track, too. But many will loose. In fact, if the writer is cash starved, then it is a possibility that applying this method to past equipment gambles wasn t that successful. Reader: The secret to having a good balance sheet is certainly a fair amount of discipline when it comes to withdrawing earnings for yourself or to buying equipment, but the secret to being successful is finding opportunity and exploiting it.

Tom: Sorry, I can t agree. The secret to being successful is achieving your goals. The secret to hassle free management is having a 2 to 1 current ratio. The secret to buying equipment is buying that which allows you to do it cheaper, better and faster as soon as you plug it in. But, more on that in a future message.

Thanks for the points. Your views are always welcome. If you have a comment on this or other subjects, please message me at TomCrouser@aol.com.

Happy Trails.

Tom Crouser
Crouser & Associates Performance Group program includes two on-site evaluations by Tom Crouser each year along with two group meetings. Management training is held during the group meetings along with participation in a meeting with non-competing printers. Join others who have decided to run their business instead of the business running them. Reply to by Email to Tom Crouser for more detailed information or call Clark Workman at (304) 342-5100. Or fax (304) 342-5187 or contact crouser@ibm.net.
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