Posted on Fri, May 07, 2010 @ 01:28 PM
There comes a time in the life of all IT assets for them to be replaced. As the IT decision maker, you are constantly involved in the budgeting and procurement of new IT products and services for various projects. As a part of your project planning, the displacement/repurposing of old assets becomes critical to your success. When you choose to lease, and are conscious of lease terms and end dates, displacement and disposal of old assets becomes predictable.
There are many processes - and therefore costs - associated with a reoccurring lifecycle project. There are different ways to approach end-of-lease costs. Below is a list of factors to consider.
- Early termination penalties
- Shipping time and costs
- Coordination of logistics
- Paperwork and lease closing
- Certificate of data destruction
- Handling accessory items
- Update asset management tool
- Potential recycling and disposal
- Month-to-month payments
- Final QA of leased hardware
- Harvest of software licenses
- Regulatory requirements
Best Practices
As you can see, there are many activities required to successfully retire IT assets, and you need to consider the time and resources required to complete all of these tasks. There may also be software licenses required, such as programs required to perform HIPPA- or DOD- compliant data destruction. If your organization is large and frequently involved in lifecycle refresh projects, you will likely build economies of scale for these processes. However, if your organization is small or medium sized, it may be difficult to employ all the resources required to successfully complete a lifecycle refresh. In this case, you may consider outsourcing some or all end-of-lease activities, so that your team can focus on other priorities.
Plan for the Costs
One way to reduce your end-of-lease costs is to plan for them, and build some of these expenses into the lease payments. For example, leasing a manufacturer's warranty that matches the lease term will help keep costs down. Also, your lease agreement probably has stipulations for excess wear and tear, and having a manufacturer's warranty can help cover the costs of repairs before the leasing company receives the asset.
Plan for the end of Lease Early
Sometimes managing the end-of-lease process is as simple as planning it when you first sign your lease agreement. By planning at the beginning of your engagement, you give yourself the maximum amount of time available to pull off a successful end-of-lease project. If you choose to begin planning later, a best practice is to start at least six months before the lease end date.
Engage Your Lease Partner
Treat the leasing company like one of your own internal resources. They are, after all, your partner. Meet to discuss their requirements. If a particular requirement is going to be difficult, ask for a workaround or creative way to mitigate the risk. Your lease partner wants to stay engaged, especially because this gives them an opportunity to continue to earn you business.
Consider Working with a VAR/Reseller
The VAR/reseller community is a rich resource for lifecycle management projects. End of lease services are common among VARs/resellers, and many have built tremendous scale around them. If you are a part of a small- or medium- sized business, this may be a cost effective option to pursue.
Involve The Manufacturer
If the manufacturer was involved in any part of the leasing process, they may also offer end-of-lease services, and may be able to offer creative solutions to lower your current end-of-lease costs.
This post concludes my series on a Focus on Leasing. I hope this information has provided you with new insights, suggestions and tips on how to approach and manage your leasing environment. Doing so can positively impact your future technology lifecycle refresh projects in the most cost-effective way possible. Thanks for your time!
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease Partner
- The OEM Lease
- Interest-Free Leasing
- Managing Lease Schedules
- Managing the End of Lease Process
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Image credits
http://upload.wikimedia.org/wikipedia/commons/8/84/Brokenlaptop.gif
Posted on Fri, Apr 23, 2010 @ 10:53 AM
After successfully leasing new technology equipment and/or services, it is important to manage your lease schedules on an ongoing basis. Lease schedules will affect future budgets and, without the proper attention, can cause you to make hasty decisions that may hurt your budgets, prompt you to make month-to-month payments, incur costly end-of-lease penalties and/or services. The good news is that managing your lease schedules can be very easy, and if done correctly, put you in a position to be proactive with technology refresh projects.
Let's start with a quick definition: A lease schedule is simply a list of leased equipment and includes information such as the lease start date, term, monthly payment and an equipment description. Below is a sample lease schedule.
It is common for lease schedules to be available in two basic formats:
- Presented as data in a web browser, or
- A simple spreadsheet.
Most leasing companies and banks have some type of client-facing online tool that you can use to access this data over the web.
Here is where managing your lease schedules gets tricky, and why it can be helpful to standardize for internal management: Say you have elected to lease various technology products and services ranging from copiers and printers to PCs, laptops and servers. You may have multiple lease partners and lease schedules from each partner. In order for you to effectively manage all of these schedules, you need to place all of the data into one place, all in the same format.
Whether you choose to manage your lease schedules with a simple spreadsheet or a complex asset management database, you need to proactively get your hands on the raw data. While each of your lease partners will be more than happy to share the data, each partners' data will come over in slightly different formats.
The first step is to collect all of the raw data from each of your lease partners, and organize it into a consistent, usable format. Once the data is organized, you can begin proactively managing your lease schedule and resulting technology refresh projects.
Tips for Effectively Managing Your Lease Schedules
-
As a part of your lease partner evaluation process, confirm that your potential lease partner will give you access to online tools that help you manage your lease schedules and schedule data. Ask for a software demonstration. Confirm that the leasing company's software meets your needs, is easy to access and easy to use. You potentially won't use these tools on a regular basis, so even a small challenge may become a large one down the road if you don't remember how the software works.
- Designate someone on your team that can become well-versed in leasing, your internal operations related to leasing and how your financial decision makers prefer to leverage leasing options. Create goals or incentives for this person so that your technology refresh projects are proactively attended to in a way that minimizes cost. Measure the results of this effort. It affects your bottom line.
- Ask your preferred reseller or VAR how they can add value through lease schedule management. It may be the case that the reseller or VAR has a solution, and all you have to do is ask for it.
- Leverage your lease schedule information to help budget for future quarters. Your lease end dates tell a good story. You can basically count on some end-of-lease activities and a decision whether or not to return the products, buy them out or extend your lease. Knowing your lease end dates gives you time to analyze your options, interact with the leasing company and get additional information from manufacturers and/or resellers and VAR before making a decision.
- The success of a leasing initiative is often determined by your organization's ability to manage its equipment return process. Working with the lessor, establish a process for communicating the disposition of each asset on a lease schedule at the end of lease. The processshould be started well in advance of schedule expiration so there is enough time to have therefreshexecuted smoothly.
- Consider structuring lease payments for seasonal fluctuations in revenues and/or structuring your lease agreement to make quarter payments based on quarterly lease schedules. Using quarters instead of months can reduce the amount of volatility that you manage. Less volatility means more control. Also, it may be the case that your organization budgets on quarters rather than months. Aligning your lease schedules with your budget cycles (either fiscal or calendar) makes leasing easier on the entire organization.
Managing your lease schedules is critical to managing and controlling your IT budgets and technology refresh projects. Having a plan and building best practices around that plan will make your projects a success. In addition, you will build additional credibility with the financial decision makers in your organization.
Which method works best for you? Please feel free to comment.
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease Partner
- The OEM Lease
- Interest-Free Leasing
- Managing Lease Schedules
- Managing the End of Lease Process
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Posted on Fri, Apr 16, 2010 @ 03:37 PM
How can your organization leverage 0% interest leasing to your advantage? As the IT decision maker, it is important to understand how and when to use this type of OEM program. Remember: there is no free lunch. When interacting with your finance or treasury department and financial decision makers in your organization, it is very important to have the facts of how your proposed 0% interest (or interest-free) lease works.
0% interest leasing is an OEM sales tool
I have yet to find a bank or leasing company that is willing to loan interest-free money. OEMs, on the other hand, are willing to provide this type of low-cost lease in an effort to hit their sales and revenue targets. A 0% interest lease program may be a wise use of your organization's money, so it important to understand the framework in which you will need to consider your decision.
Also, if you already have a strong, existing lease partner, the OEM programs may be more difficult to justify, as there may be more complexities or risks involved in deviating from your existing lease partner — terminating that relationship may result in lower quality negotiations with them in future. Or, if the buyout of an existing lease is required to end the relationship, if can be expensive. Also, there is inherent risk in not knowing much about a new lease partner as compared to the partner you're already familiar in conducting business with.
However, there are certainly instances when entering into interest-free leasing agreements makes good business sense. Simply consider 0% interest leasing as an opportunity for additional product discounts. Previously, we talked about the fact that OEMs will often create special lease offers on a specific products that are in great supply, or may offer opportunities to buy any product within a specific lease structure — interest-free leasing can fall into both categories, and can be broken up into programs that suit the needs of small, medium and large organizations alike.
Small Business Programs
As an IT decision maker for a small or medium-sized business, you understand that your budget for IT purchases may be limited, making 0% interest leasing an attractive option.
One style of program offered by many OEMs that may help make your procurement less expensive is a short-term, 0% interest, $1-out lease. While the term is very short (typically 12 months), this type of lease is still considered a capital lease because of the $1-buyout structure and transfer of title at the end of the lease. This is a great alternative to borrowing money or using a bank line to finance the purchase.
Understanding this program should be very straightforward: simply add up your purchase price plus sales tax and shipping, then divide the total by 12. Your calculation will be very close to your actual payment.
The major drawback to this type of program is that services are typically not included in the lease — if you plan to purchase a products and services bundle, the 0% interest option will likely not apply. That being said, paying cash for the services and financing the hardware at 0% for 12 months is still a good deal.
Medium & Large Business Programs
In my experience, most mid-size and large organizations have strict lifecycle/refresh policies in place for technology. In addition, there may be more stringent finance and accounting rules regarding technology products and services purchases. As the IT decision maker, you should be aware of these policies, which may prohibit you from deciding to finance a large technology purchase for more than 12 months.
However, for these technology purchases, the OEM may also offer an interest-free FMV lease. This style of lease is much more difficult to deconstruct than the example above, as referenced in the post on understanding your lease payment, because in an FMV lease you're financing the fair market value, not the residual value, of the leased product/services.
A 0% interest FMV lease is complicated for two reasons: First, the lease term is usually locked somewhere between 24-36 months, and secondly, the residual value of the leased products will be higher than normal. It may be difficult to compare an OEM's 0% interest FMV lease with a bank or leasing companies' FMV operating lease.
The best place to start is to compare your estimated monthly payment from the OEM and another potential leasing partner. If you are interested in the mechanics of how the OEM is calculating your lease payment, do not hesitate to ask questions — they should be more than happy to discuss your money factor, credit worthiness, and the product's residual value.
OEM programs for 0% FMV leases tend to be very strict: the term is fixed, the money factor is fixed, the residual value is fixed, and your organization must have very good credit. There is, essentially, a "magic formula" that the OEM is using to come up with a 0% interest FMV payment — the manufacturer is getting aid from controlling the cost of their equipment, which they clearly get at a lower cost than anyone else, (also referred to as "blind discounting"). The interesting part here is that if you try to use the same lease factor against equipment not produced by this OEM, it cannot be done at the proposed rate.
The good news is that your organization will get a low monthly payment for a short-term operating lease. However, deviating from that "magic formula" by adding products not manufactured by this OEM, will likely result in additional interest charges. This points to one benefit of using an independent lessor — the lease factor will be more consistent across all equipment platforms.
Summary
Interest-free leasing is an option that OEMs use to provide their customers with additional product discounts. While each OEM has their own approach, there are a few basic styles of 0% interest leases. Make sure that you carefully weigh your leasing options, especially if your organization already has a preferred lease partner.
Has your organization taken advantage of interest-free OEM leases? Would any information here have caused you to consider a different path?
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease Partner
- The OEM Lease
- Interest-Free Leasing
- Managing Lease Scheduling
- Managing the End of Lease Process
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Image credits
http://farm3.static.flickr.com/2086/2247520563_22ec130817.jpg
http://thejvzone.com/affilprogs/6pak/theMagicFormulaCover.jpg
Posted on Fri, Mar 19, 2010 @ 03:25 PM
If you are a numbers geek like me, the process by which you calculate a monthly lease payment is fascinating. If you aren't, however, then this can be quite a tedious process.
To simplify the task, I'd like to share with you a table that I find helpful in calculating monthly lease payments to determine their overall cost. When looking into several lease options, filling out a table like this can help sift through the details and determine which package offers the best deal, and how each would compare to financing costs for purchasing.
Example:
Let's say your business needs a $38,000 multifunction plotter. You can finance the plotter for $1,250 per month for 36 months, or you can lease it for $790 per month for 36 months. In this example, the lease price appears to be significantly less expensive per month.
Below is a pre-calculated lease for your new multifunction plotter. This example represents the major inputs and outputs that a leasing company or bank will use when calculating your lease payment. The goal is to understand the definitions of the various components that make up a lease payment.
The yellow highlighted cells are your inputs. All other cells are calculated for you. Please keep in mind that the example below is for example purposes only and does not reflect a live transaction.
Simple "Large Ticket" Lease Pre-calculated Example:
Before signing any lease agreement, there are likely a few basic questions that you'll want to be able to answer. Using the example and table above, let's go through a few of the major ones:
How do I know if $790 per month for 36 months is the correct monthly payment?
As you just learned in the above example, the $790 per month payment is calculated based on a number of factors. The factors that play into your monthly payment are the Total Finance Amount, Soft Costs, Term, Credit Worthiness, and Lessor Total Equity. So the payment is always correct. There is no grey area in the calculation.
How does the leasing company make its money?
The leasing company makes a small amount of money based on the debt rate spread. The lessor also has a cost of funds. If the lessor's cost of fund is 6% and passed along a debt rating of 6.25% the leasing company only makes 0.25%. Leasing is a competitive business so the spreads are typically very low.
The leasing company makes most of its money by reselling the plotter at the end of the term. It is in the leasing company's best interest to keep their Lessor Total Equity as low as possible while keeping the Lessor FV Equity as high as possible. Keep in mind that the leasing company cannot artificially set these amounts because the market for used plotters is based on industry established residual values.
How much interest am I paying?
In the above example your organization is paying 6.25% interest. Keep in mind that many leasing companies do not discuss interest rates, only money factors. There is no harm in asking about the interest rate being used to calculate your lease payment.
Am I getting a good deal?
In this example you got a good deal. The lessor is taking a very high position in the deal and is rating your organization's credit as investment grade. Your ability to get a "good deal" depends on two things.
- Your organization's credit — something that you, as the IT decision maker, cannot directly affect.
- The lessor's familiarity with the types of products that you are considering leasing — a leasing company that specializes in plotter leases will take a more aggressive position in your plotter lease than a leasing company that specializes in other products. Like your organization specializes in its core competencies, so do leasing companies.
So, as you can see, by taking a careful look at all the values that affect your total lease cost, you can determine the overall quality of the lease agreement and easily compare it with others.
Please feel free to download the Leasing Calculator Excel sheet and use it to evaluate your next leasing option.
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease Partner
- The OEM Lease
- Interest-Free Leasing
- Managing Lease Schedules
- Managing the End of Lease Process
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Posted on Fri, Mar 12, 2010 @ 02:05 PM
One topic that rarely comes up when speaking to clients about leasing options is capital vs. operating leases — a very important consideration. These are the two types of leases, and each has its own accounting treatment. The major difference between them is that capital leases transfer ownership of the leased product, while operating leases only transfer the right to use the technology.
Choosing the correct lease structure is critical because it affects how your finance department records the lease on your books.
Capital leases are reported on your balance sheet and operating leases are not. Even if you are a privately held company your finance team still keeps good accounting records and communicates on a regular basis with your major creditors.
Capital Lease
The most important concept to understand about a capital lease is the word capital, as in cash or credit. The accounting treatment of a capital lease is similar to an outright purchase. As the lessee, you are obligated to report a capital lease as an asset and a liability on your balance sheet. As such, your organization may claim depreciation on the assets.
- In a capital lease, your organization only assumes some of the risks of ownership. The lessor (leasing company or bank) purchases an asset on your behalf.
- The lessee (you) will have use of the asset during the lease term.
- You make rental payments (including tax and interest) to the lessor that covers a large portion or all of the original cost of the asset.
- Your organization records the capital lease on balance sheets as an asset and a liability.
At the end of term, you have many options available. You may choose to purchase the asset outright, return the asset to the lessor, or extend the term of the lease and continue to make payments. At the end of the lease, if you choose to purchase the asset, the cost to take ownership may be low, sometimes as low as $1. Keep in mind that a capital lease does not imply $1 out; a capital lease may have a fair market value (FMV) buyout. A FMV buyout may be cost prohibitive. Capital leasing is a creative way to acquire a bundle of technology products and services over a period of time. This option may be more attractive than using a bank credit line or paying cash.
Capital leasing is a creative way to acquire a bundle of technology products and services over a period of time. This option may be more attractive than using a bank credit line or paying cash.
Operating Lease
The most important concept to understand about an operating lease is the word operating, as in operating expense. In an operating lease, only the right to use the technology is transferred from the lessor to the lessee. When leasing IT products and service, it is harder to qualify for an operating lease due to the increased risk the lessor takes on.
Operating Lease Requirements (Statement of Financial Accounting Standards - FASB 13)
- The lease does not transfer ownership of the property to the lessee by the end of the lease term
- The lease does not contain a bargain purchase option (unlike the capital lease, where you are often able to purchase the asset at lease end).
- The lease term is equal to less than 75% of the estimated economic life of the property.
- The present value of the minimum lease payments, assuming an appropriate discount rate must be less than 90% of the fair value of the property at lease inception.
Operating Lease Basics:
- The lessor (leasing company or bank) purchases an asset on your behalf.
- The lessee (you) have use of the asset during the lease term.
- You make rental payments (including tax and interest) to the lessor, which only covers the use of the asset for the term.
- Your organization records the operating lease as an operating expense on income statements.
At the end of term, the lessee has many options available to them. The lessee can choose to purchase the asset outright, return the asset to the lessor, or extend the term of the lease and continue to make payments. At the end of the lease, if you choose to outright purchase the asset, the cost to take ownership can be very high. The FMV in a operating lease cannot be pre-negotiated. Hence, operating leases are a creative way to utilize a bundle of technology products and services over a period of time, typically followed by a refresh of the technology. Extending the lease term typically converts the lease to a capital lease for the new term. This option may be more attractive than capital leasing, using a bank credit line, or paying cash.
Applying Leasing to IT Projects
As an IT decision maker, you need to know your organization's preferred accounting treatment for leases. Knowing how your organization prefers to account for leases will affect your strategy when evaluating lease options.
For example, if your organization prefers operating leases:
- You probably will not find a 60-month operating lease for PCs, laptops, printers, or other IT products, because the lease life would exceed 75% of the useful life of the asset and payments would exceed 90% of the present value of the asset.
- You will be limited as to how many services dollars (soft costs) are wrapped into the lease, because services are not tangible and cannot be recovered by the leasing company, and payments would exceed 90% of the present value of the asset.
- You will most likely refresh your technology products and service at the end of the term because buyouts are based on fair market value and can be very cost prohibitive, and your money factor may require you to return all of the assets at the end of the lease.
- You cannot negotiate the residual value of the assets to be leased because the lease cannot contain a bargain purchase option and the low residual values may cause your payments to exceed 90% of the present value.
If your organization prefers capital leases:
- You can choose a longer lease term sometimes as long as 72 months for IT products and services
- Leasing may be a better way to make payments than using a bank line
- Easier to get approved for a capital lease than a new bank line
- You can bundle a lot of services into a capital lease
- There are no restrictions regarding the present value of the equipment
- May provide a way to finance services of a specific term
- You can negotiate your lease payment and residual value (FMV or $1 out)
- No restrictions regarding a bargain purchase option
- Creative way to keep your monthly lease payments low
Did you recently make a leasing decision after considering both capital and operating lease options? Which did you choose? What affected your decision?
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease Partner
- The OEM Lease
- Interest-Free Leasing
- Managing Lease Schedules
- Managing the End of Lease Process
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Image Credits:
www.techfin.com
www.miamism.com
Posted on Thu, Mar 04, 2010 @ 09:47 AM
Often, I have met with clients who want me to quote them a "buy price" and a "lease price" for new technology procurements - a very reasonable request. What I have learned, however , is that my client was really asking a very different question: "How much does your solution cost and what is the most cost-effective way for my organization to pay for it?" This is where the confusion starts.
Example
Say you see an advertisement for a "brand new 44" multifunction plotter starting at only $399 per month."
You think, "wow, what a great deal. We can afford the payment." But let's dissect the offer. Below is a list of questions that you should immediately ask yourself.
- Is this a purchase or lease price?
- What is the down payment?
- What is the term? (There's a big price difference between 36 months and 72months, for example.)
Here is where the math gets tricky. Let's think back to the buy price vs. lease price question. If your organization needed a 44" multifunction plotter, the $399 per month is very attractive. But think about that offer: If you know that the cost to buy that printer outright is $38,000 plus tax, that would mean that financing plotter for 72 months would equate to a cost of more than $550 per month. Keeping in mind that 72 months is six years, how is it possible to buy a $38,000 unit for only $399 per month?
Most likely, the $399 per month payment is for an operating lease, which provides a low monthly payment for the use of the machine. You only pay for depreciation for the duration of your lease term, and do not own the machine at lease end. If the plotter generates monthly revenue, there is an advantage to keeping your monthly payment lower than the revenue it generates, thus increasing ROI. This low monthly cost is the advantage of the operating lease. At the end of the lease term, you can turn in the existing multifunction plotter and lease another new one, effectively upgrading for a very low cost.
In this example, the major benefit is that you have successfully increased your buying power. In contrast, buying the plotter outright would cause a drop in available cash, result in a lower ROI and require an expensive upgrade in the future. The trade-off is that leasing requires more discipline and commitment than buying. For example, you don't get to keep the printer unless you buyout the lease. You also need to consider the cost of end-of-lease processes.
Advantages of Leasing
In any leasing scenario, there are several potential advantages to consider when making a procurement decision.
Options
Leasing provides your organization a lot of ownership options. Your new IT products and services can be leased for a term and then returned, renewed, extended, or purchased.
No Down Payment
It is typical to put $0 down when leasing IT products and service. However, making a down payment lowers your monthly lease payment, so it may not always be the best option.
Everything is New
Almost all leases for IT products require that the products being leased are brand new. This means that you get the full benefit of the manufacturer's warranty and don't need to worry about existing wear and tear.
Increased Purchasing Power
There are two basic ways that leasing can increase your purchasing power.
- If you only have $30,000 in the bank and you need to buy a $38,000 multifunction plotter you can lease it. A leasing company is extending you credit.
- If you know that you are going to need a new $38,000 multifunction plotter every four years, then leasing is a great way to keep your payments as low as possible.
Balancing Cost and Value
Leasing gives you an advantage if the monthly lease payment for a bundle of IT products and services creates a return that exceeds its cost. By using equipment for lowest possible monthly price, you increase your monthly net revenue.
Fixed Rate Financing
Your money factor is fixed for the term of the lease. Fixed-rates financing make it easier for your organization to project monthly cash flows. Very little consideration is given to market fluctuations after the lease is signed.
Less Sales Tax
Instead of paying the full tax amount up front, a portion of every monthly lease payment is paid for sales tax. In addition, you pay tax only on the dollar amount of the technology products and services value you are using, not on the residual value.
Flexible Payments
In many cases, you can negotiate monthly lease payments that meet your needs. Adjustments to your monthly payment can be made by adjusting the term of your lease or by correcting the residual value of the IT products and services due at the end of the lease.
Fewer Service Issues/Costs
Many IT products come with a three-year manufacturer's warranty. Leasing potentially gives you the advantage of never being out of warranty, therefore keeping your ongoing service and maintenance costs down.
Conserve Working Capital (cash)
Leasing allows you to keep cash in the bank or invested in higher priority projects. Compared to other company assets such as property, plants, and manufacturing machines, IT product lifecycles and depreciation are very short - sometimes as little as three years. Paying for IT products and services for lifecycle refresh projects with cash may not be the best use of your cash.
Preserve Your Credit Lines
Your bank lines are more useful to your organization for inventory, accounts receivable, and emergencies. Tying up bank lines with fixed assets decreases your borrowing power, while leasing allows you to finance your IT products and services without disturbing your bank lines.
Gap Insurance Included
Some leases include free gap insurance meaning if you break your laptop beyond repair and/or it is stolen, and there is a gap between what your insurance company will pay you for the loss and the amount you owe, you'll be covered for the loss.
What factors were the most important in your last IT procurement?
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease Partner
- The OEM Lease
- Interest-Free Leasing
- Managing Lease Schedules
- Managing the End of Lease Process
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Image Credits:
http://wilpf.org/docs/BlueDollarDrop.jpg
http://farm4.static.flickr.com/3118/2625862787_1952f58e2a.jpg
Posted on Fri, Feb 26, 2010 @ 07:47 AM
Now that we have the leasing vocabulary down, it's time to starting digging into how organizations make financing decisions for new IT projects. This week I will discuss a couple of basic ways in which most organizations evaluate IT purchases.
Example Exercise: Think About Personal Finance Decisions
Let's start with an exercise that will frame up our conversation. Pretend that you are in the mood to purchase a few new items from your local electronics store: a 70" plasma TV ($5,000), a Blu-Ray disk player ($200), and a Blu-Ray disk movie ($20). Note, in this example all of the items go on sale in different weeks, so you cannot purchase all three items at the same time. This is a very wide range of prices, and having limited funds available in the ol' checking account to pay for such wonderful new toys, you have to weigh your options on how to best fund your new purchases. Here are your choices:
1) The electronics store is offering 24 months interest-free financing for purchases over $1,000
2) You have a personal credit card with a high limit
3) You can write a check and/or pay cash
With this information in mind, you decide that the best option is to:
- Use the 24 month interest-free financing option to purchase the TV. The purchase price of the TV plus 7.5% tax equals $5,375. That's approximately $224 per month for 24 months.
- Next, put the Blue-ray player on your credit card. That way you can save your $200 until your next credit card billing cycle, essentially deferring the payment a little. In the mean time you will collect a paycheck or two, allowing you to save up the $200 required to pay off your balance.
- Finally, simply pay cash for the $20 Blu-Ray.
Being the wise shopper that you are, you have just used your personal credit to finance your purchases. By appropriately spreading out the payments, and by managing your personal cash flow, you can now enjoy 70 inches of HDTV greatness. The payment methods you chose for Blu-Ray player and movie were far less complex, but still important.
Apply This Rationale to Business Decisions
Let's apply similar logic to your organization. Like to your checking account, credit card, and a 24-month financing option, your organization has a number of options when it comes to financing IT decisions. Being financially stable, your organization most likely has cold hard cash in the bank, as well as various existing credit lines with banks and other lending institutions. Your organization can also choose to open a leasing account, or can choose a "pay as you go" or "pay per use" option, essentially renting new IT products.
So, what are the details of these common options for procuring new IT products, and what are their pros and cons?
Outright Purchase
When you purchase your new technology products and service outright, you assume full ownership at the time of purchase. There are two basic ways to finance your outright purchase: You can pay cash, or you can use one of the company's lines of credit. Once you make the purchase, your company will likely choose to either expense or depreciate the IT assets, generally determined by the dollar value.
Pros:
- You own the assets
- You get to squeeze every last drop of useful life out of the assets
- You can choose to expense or depreciate the assets, potentially giving you an accounting advantage
Cons:
- You just took cash out of the bank or leveraged a credit line to make the purchase
- You just paid the full sales tax amount for the purchase (unless you work for a school or non-profit)
- You may have limited ability to return the product and/or upgrade inexpensively
Leasing
Leasing is simply another type of credit line that is extended to your company by a bank or leasing company. There are two basic types of lease arrangements: Capital and Operating.
Capital Lease
In a capital lease your organization assumes only some of the risks of ownership. The most important concept to understand about a capital lease is the word capital, as in cash or credit. The accounting treatment of a capital lease is similar to an outright purchase. As the lessee you are obligated to report a capital lease as an asset and a liability on your balance sheet, and your organization can claim depreciation on the assets.
Pros:
- Spread out your payment over the term of lease
- Sales tax payments are spread over the term of lease
- End-of-lease options include outright purchase of the residual or return to the lessor
- For a fee you can terminate your lease before the end of the term
Cons:
- Considered an asset and a liability on your balance sheet
- Money factors and mothly payments are typically higher for capital leases vs. operating leases
Operating Lease
In an operating lease only the right to use the technology is transferred from the lessor to the lessee. The most important concept to understand about an operating lease is the word operating, as in operating expense. When leasing IT products and services, it is harder to qualify for an operating lease than a capital lease. Operating leases do not show up on your balance sheet.
Pros:
- Spread out your payments over the lease term
- Sales tax payments are spread over the term of lease
- Payments are treated as an operating expense
- Typically lower money factors and payments vs. capital leases
Cons:
- Harder to quality for an operating lease than a capital lease
- You cannot negotiate upfront for a end-of-term buyout price
- Early termination can be very expensive
Pay-Per-Use
In IT, pay-per-use is typically attributed to software as a service (SaaS) and copier/printer technology refresh projects. Pay-per-use models typically include a bundle of products and services. For example, a pay-per-use model widely used in the copier industry is cost-per-page. Your organization's cost-per-page may include fees for the lease or rental of the copier, toner, service, and maintenance for a specific term.
Be aware that it is nearly impossible to compare a pay-per-use procurement option to a non pay-per-use. This is because pay-per-use procurement options are usually slightly more expensive than a typical lease or outright purchase, however they also come bundled with more value.
Pros:
- Essentially a rental agreement that can be treated as an operating expense
- Flexible options to stop using the service (common of SaaS programs)
- You get a lot of extra value for the dollar
Cons:
- You always have a payment
- You never get to own the product, only use it
- Can be difficult to compare to more traditional procurement models
Just like with personal financing, when your organization is procuring new technology products, understanding the options available can help you make smarter purchase decisions. What options have you taken advantage of in procuring new technologies? How have they worked out long-term?
Spotlight on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease Partner
- The OEM Lease
- Interest-Free Leasing
- Managing Lease Schedules
- Managing the End of Lease Process
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Image credits:
http://www.smexcellence.com.au/images/uploadedimage4153137.jpg
http://syriaalaan.com/wp-content/uploads/2010/01/Business-Finance.jpg
Posted on Fri, Feb 19, 2010 @ 09:51 AM
Greetings! My name is Jeff, and for the next ten weeks I am going discuss the topic of technology leasing. So, before we get started, I think it's important to frame up our conversation and find some common ground. Let's take a moment to quickly build some value into our conversation.
From an IT perspective, I know that leasing and financing are not the hottest topics, and I can bet that learning about leasing is not in your top 10 priorities. Having said this, let me take moment to set the stage with the following scales.
The Cool Scale (1 - 10):
- Technologies such as VoIP, Visual Communication, and Virtualization - 10
- Leasing - 0 (Didn't make the list)
- Leasing cool technologies such as VoIP, Visual Communication, and Virtualization - 3
The Importance Scale (1 - 10):
- Having the appropriate technologies that drive down the cost of doing business - 10
- Appropriately financing those technology investments in order to maximize ROI - 10
So, even though leasing may not be very cool, per se, having knowledge about the topic can certainly help you make the case for obtaining the technology your organization needs in the most cost-effective way. My goal over the next ten weeks is to help those who make technology investment decisions better understand leasing, and how it can positively impact your future technology lifecycle refresh projects.
As the IT decision maker, it's important to be able to have relevant conversations with your CFO, the manufacturer or OEM who makes the products you're considering, and the bank or leasing company that has been recommended to you. This will help you find some common ground with finance, and even make better-informed recommendations for new technologies. As we move forward, I encourage you to ask questions and provide feedback. I sincerely look forward to assisting you in meeting your business goals and objectives.
What are the important terms to understand when considering leasing?
To lay the foundation for future posts on technology leasing, following are some general leasing terms and what they mean. Understanding this vocabulary will help you ask better questions, and get better answers when engaged in a leasing conversation.
Time Value of Money
This is the fundamental, underlying principal that guides investment decisions. I'm offering you a risk-free return, no strings attached, however you have to pick from only one of two options:
- Option 1: I will give you $100 today
- Option 2: I will give you $100 a year from now
The time value of money simply suggests that the best option is to take your $100 today. Why? Because $100 today is not worth $100 one year from now; if you wait a year, you are essentially losing money. The simple takeaway is that money now is better than the same amount later.
Lessor
The lessor is the party/company/bank who is leasing the technology products and service to you. Though you may have a technology consultant guide you through options and offer advice, this company is typically not your lessor — the lessor is always a bank or other financial institution. If your technology partner (VAR) highly suggests that you lease directly through them, as opposed to evaluating multiple lease options, run!
Lessee
The lessee is the person/company leasing technology products and services. (This is you.)
Term
This is the length of the lease agreement. Typical technology leases range from 24-60 months, depending on the technologies being leased; however, a lease can be for any term. When comparing lease options, do not fall into the trap of comparing dissimilar lease terms. Make sure you compare "apples to apples."
MSRP
You most likely already know this term, but it stands for Manufacturer's Suggested Retail Price. Many advertised lease offers are based on MSRP or above. However, the MSRP is not necessarily your final price.
Capitalized Cost
This is basically the negotiated price of the technology products and services. Think of this as your complete bill of materials (BOM). Capitalized cost becomes one of several figures used in calculating a monthly lease payment.
Residual Value
This is the lessor's prediction of what the technology products will be worth at the end of the lease. The residual value is also important because it affects your monthly payment: the higher the residual, the lower your monthly payments.
However, software and technical/professional service have no residual value because the leasing company cannot resell them at the end of the lease. For this reason, bundling software and service into one lease can have a dramatic affect on your lease rate.
Sales Tax
If you hate paying taxes, you are going to love this aspect of leasing: when you lease a product you do not pay sales tax the same way that you would if you were to outright purchase the exact same product.
Instead of paying the full tax amount up front, a portion of every monthly lease payment is paid for sales tax. In addition, you pay tax only on the dollar amount of the technology products and services value you are using, not on the residual value. Think back to the Time Value of Money, Capitalized Cost, and Residual Value concepts. Would you rather pay your full tax bill today or spread your payments over a specific term?
Security Deposit
The security deposit is usually equal to one monthly payment. Multiple security deposits can sometimes be made to reduce the interest rate and, consequently, the monthly payment.
Payoff Amount
Sometimes called buyout amount, this is the amount of money you have to pay to own the technology products and service that you originally chose to lease. The payoff amount might be different from the residual value because of a refunded security deposit.
Early Termination
If you are not happy with the products that you have leased, or you believe you will gain a lot of value by switching to a different product before your lease term is up, you may be able to start from scratch with an early termination of the lease. Be careful: this can be a useful tool, but it can also be very costly.
Depreciation
This is the amount by which property (in this case, some technology product or service) loses its value. In leasing, depreciation is the difference between the cost of the technology product when it is brand new and the value of the technology product at the end of the lease (plus tax, interest and various leasing fees).
As with residual value, software and technical/professional service have no depreciation because they are essentially worth $0 at the end of the lease.
Subsidized or Subvented Lease
To make a lease more attractive (i.e. make the monthly payment lower), manufacturers (OEM) sometimes subsidize or subvent the leases. This means that the manufacturer or OEM is either offering a very low interest rate or is inflating the residual value of their products. Both tactics have the effect of lowering the monthly payment for you, the consumer.
Excess Wear and Tear
Most lease contracts have a clause which states that the company leasing the technology products and service is responsible for the cost of "excess wear and tear" to the products when they are returned. Read your contract carefully to understand what is considered "excessive."
One extra step that may help you avoid having your security deposit revoked or incurring extra charges from the leasing company is purchasing end-of-lease servicing, which will bring your laptop back to like-new condition.
Gap Insurance
If you break your laptop beyond repair and/or it is stolen, there might be a gap between what your insurance company will pay you for the loss and the amount you now must pay to the leasing company. If you take out gap insurance (it is included in some lease contracts), this will cover you for this loss.
Money Factor
Pay close attention to this one. Your approved money factor will heavily influence the amount of your monthly lease payment. Also called a lease factor or even a lease fee, this is the interest rate you are being charged.
It is expressed as a multiplier that can be used to calculate your monthly payments. The money factor is calculated using a Present Value formula and is based on: the total dollar amount being leased, the lease term, your company's credit worthiness, your security deposit, and the residual value of the technology products and services that you intend to lease.
Thank you!
Thanks again for your time today. If you found this information useful, I invite you to read my future posts (upcoming topics are listed below) on leasing over the next several weeks.
I would love to know how leasing may affect your business decisions, and welcome you to leave comments and ask questions about topics you'd like to see addressed.
Focus on Leasing Topics:
- Leasing Vocabulary
- Financing Decisions
- Advantages of Leasing
- Capital vs. Operating Leases
- Understanding My Payment
- Picking a Lease Partner
- The OEM Lease
- Interest-Free Leasing
- Managing Lease Schedules
- Managing the End of Lease Process
Jeffrey Goldstein is Senior Consultant at MCPc and is responsible for the delivery of hardcopy and value-added services within the Lifecycle Management Group. Jeff earned his BS in Management of Information Systems and Supply Chain Management from The University of Akron and his MBA from the Weatherhead School of Management, Case Western Reserve University. Connect with Jeff on LinkedIn.
Image Credit: TheMortgageReports.com