Equipment maintenance can be costly and inconvenient. But your business must have working equipment to be successful. Budgeting for equipment maintenance can minimize the negative impact and improve your bottom line. Maintenance costs are an investment in your business.
Maintenance Costs are an Investment
Capital expenditures are assets that help to generate profits for your business over the long term. These include
- Property (buildings and land);
- Equipment, including vehicles, machinery, etc.
- Hardware, such as computers, phones, office furniture, etc.; and
You probably budget for capital expenditures already because they’re necessary for business. You know they are business assets.
Maintenance costs are a part of your capital expenditures. They’re a part of your investment because they’re required to keep your assets in optimal working condition. For your company vehicles, for example, this might include regular oil changes, filter changes, tire changes, and wheel alignments. Maintenance costs also include the cost of replacement parts and repairs.
Think about it this way: What is the cost to your business of equipment down time? How much money do you lose when your equipment isn’t working? The negative impact of maintenance costs can be huge, and that’s why investing in maintenance is crucial to your business success.
4 Key Benefits of Tracking & Budgeting for Maintenance Costs
Regular maintenance of your business assets is an investment in your equipment. There are several benefits of tracking your maintenance costs and budgeting for them separately from your other capital expenditures.
- Better data for decision-making: Know exactly what your equipment costs and make informed risk-based decisions with fewer surprises or guesswork
- Identify and prevent waste, inefficiencies, and cause of unreliability: Determine weaknesses in your production, and pinpoint areas for improvement and additional investment for optimal ROI
- Increase the performance and life of your assets: Keep your equipment working better and longer
- Reduce production delays: Prevent equipment down time and revenue loss
This is why maintenance costs are an essential part of your capital expenditures budget.
How to Accurately Budget for True Equipment Costs
Your initial capital expenditures are investments intended to improve efficiency, increase production, and gain a competitive advantage. You expect that you’ll see a return on your investment over time. But before deciding on a capital expenditure budget, it’s important to consider all the costs involved, including maintenance costs.
When deciding if an asset is worth the expense, we typically calculate the projected revenue generated by the asset, subtract the initial cost of the asset, and if we’re left with a positive amount, we consider the asset a profitable investment.
But a more accurate calculation includes the maintenance costs, or the maintenance capital expenditures. Warren Buffet put it this way in his 1986 letter to shareholders: It’s “the average annual amount of capitalized expenditures for plant and equipment, etc. that the business requires to fully maintain it’s long-term competitive position and its unit volume.”
So beyond the initial cost of equipment, how much should your business spend on maintenance this year to keep that equipment working optimally and to keep your company growing? Knowing the answer to that requires you to keep accurate records of your maintenance costs from year to year, and you must record them as a separate expense from the initial asset purchase.
Maintenance costs will differ from one asset to another. Remember, maintenance costs include:
- Cost of down time, including waiting for back-ordered parts or service tech availability
- Staff labour costs for smaller in-house repairs
- Replacement parts
- Service technician costs, including travel and accommodation expenses
See also How to Make Your Business Profitable for a helpful guide to help you calculate what it costs to run your business.
How to Decrease Maintenance Costs
Tracking your maintenance costs will help you learn to reduce them. You’ll notice patterns and determine where you’re spending the most money on repairs and preventable maintenance. Here are a few tips to help you reduce maintenance costs.
- Invest in comprehensive training for equipment operators to prevent improper use and damage.
- Purchase replacement parts before you need them to avoid back-orders, rush fees, and higher costs at a later date.
- Schedule regular maintenance and plan production accordingly. It costs less to maintain equipment than to repair it.
- Invest in monitoring technology to assess the condition of your equipment and help you avoid repairs.
While maintenance costs are a crucial investment, eventually the cost of maintaining an older piece of equipment warrants an upgrade. The more frequent the repair needs become, the greater the profit losses become. The reliability and increased productivity of a new asset can reduce your overall annual maintenance costs.
Knowing when to start planning for upgrading your equipment will help you get ahead on the purchasing process. You don’t want to be left in a panic situation that could cost you customers or even your company. This is especially true with the current supply chain issues that are expected to last a long while. Don’t be left with no production and waiting for equipment that could be months out on delivery.
See To Keep or Not to Keep for more on knowing when to replace or upgrade old equipment.
Equipment Lease Financing & Maintenance Costs
Equipment lease financing is an excellent way to upgrade your equipment or get the equipment you need to start production, offer more products and services, or gain a competitive advantage. Contact a leasing coordinator at Lease 1 Financial to find out about financing new equipment or to learn more about maintenance costs.