Cash versus leasing
Most people are familiar with the expression “cash is king”, but Kuben Rayan, Managing Executive at RentWorks Africa, believes that when it comes to managing cash-flow and conserving capital, leasing is actually often the best option.
“Many assets used in business, whether it’s a front-end loader for a construction company or a fridge in a pharmacy, are essentially just tools used to derive economic benefit,” he says. “They are not consumable goods and, generally, they will be used over a period of three to five years, so not all the benefit will be derived on day one. But, if you purchase these assets, you have to make a substantial capital outlay on day one, without being able to derive a matching benefit.”
Rayan explains that one’s payback period is shortened by choosing to fund or lease an asset instead of purchasing it cash. “It also pushes down your cash outflow requirement,” he says. “Instead of burning through huge amounts of cash without seeing any benefit, you can structure the funding with payment holidays and actually ensure that you match the outflow to your inflow. In terms of project financing methodology, your project can potentially become self-funded. Your ROI and your break-even are also enhanced.”
He adds that while acquiring funding through a traditional channel, like a bank, will result in the company paying X amount for the asset, choosing a funder that uses residual value methodology, results in the company paying X minus the residual value.
“It’s important to decide upfront what the useful life of the asset is, remembering to take into account things like obsolescence and disposal, and to run a calculation on total cost of ownership (TCO) for cash CAPEX pricing versus leasing,” he says. “The step that many people forget is to take into account the asset’s entire lifecycle. They say, ‘You’re only giving me a lease option for three years, but I can keep this PC for five years.’ But that fails to take into account the operational costs of keeping an asset beyond the initial period, with things like software upgrades, extending the warranty, break-fix costs and e-waste disposal costs.”
A white paper by the IDC suggests that in terms of TCO of servers, including server acquisition costs, IT staff costs and power and cooling costs, refreshing server infrastructure on pace with newer technology has the potential to reduce OPEX by up to 33%. The report asserts that traditional IT depreciation models fail to take into account these additional costs, and concludes that the continuing increase in computing power, which more than doubles every two years, disproves the commonly held belief that avoiding new equipment and capital expense is the best way to reduce CAPEX acquisition costs.
“Leasing can allow companies to conserve capital,” says Rayan. “It ensures they can invest in what’s core and not in expensive depreciating assets. It also affords operational flexibility, which in my mind equals financial efficiency. In fact, if you look at developed countries, many of the biggest lessees are financial institutions like banks – companies who don’t need to lease, who have acess to large amounts of cash. But banks are always looking at the best way to invest their capital and they understand that just because you have the cash doesn’t mean you should spend the cash.”