One of the main expenses for every small business is purchasing equipment. This is especially true for businesses that rely heavily on expensive machineries, like manufacturers or auto repair shops. Preparing an equipment budget will make sure that you are able to purchase and maintain all of the equipment you need to successfully operate your business. It will also help you price your products and services more accurately.
Let’s take a look at why you need an equipment budget and how you can create one for your small business.
What is Considered Equipment?
In order to create an equipment budget, you first need to understand what is and what is not considered equipment.
In general, equipment refers to anything that is necessary to run your business and will retain its value over time, including:
- Large vehicles
- Manufacturing equipment
- Healthcare equipment
- Construction equipment
- Restaurant appliances
- Industrial printers and copiers
Even smaller things, like computers, desks, restaurant tables, and phone systems, often qualify as equipment.
While there isn’t necessarily a specific cost requirement, you should typically include inexpensive, recurring costs, like pens, printer paper, small tools, and similar items, in your general budget.
How Much Should You Allocate to Your Equipment Budget?
The amount that should be in your equipment budget depends entirely on the size and nature of your business.
For example, a manufacturing business that relies on large, expensive machinery will inherently need to spend more money on equipment than a dropshipping business. Additionally, a business with multiple locations throughout the country will have higher equipment costs than a small, independent company.
Unfortunately, there is no definitive answer to this question. In order to determine how much money should be in your equipment budget, you need to complete two important steps:
- Make a detailed list of any and all equipment that your business needs.
- After making your list, contact suppliers to get quotes for each piece of equipment that you need and you still haven’t acquired.
When making your list, you should account for equipment that you will likely need in the future. A budget is a forecast of expected expenses, so it should include more than just what you need at this moment.
Lastly, you need to account for the costs of running the equipment, maintenance, and repairs. Typically, these expenses are factored into your pricing, but it’s important to know what these costs are when it’s time to get equipment financing for your small business.
Why Do You Need an Equipment Budget?
Successful small business management requires you to carefully and efficiently manage your finances.
Making an equipment budget is important for three primary reasons: pricing, purchasing, and financing.
Just because your equipment is paid off doesn’t mean it doesn’t still cost money to operate. You still have to maintain your equipment, make repairs, and you may even have to replace it in the future.
No matter what type of business you run, the pricing of your products or services should reflect the cost of using your equipment.
Your budget should include equipment that is already paid off so that you are prepared when you need to make repairs or replacements.
Equipment budgets will also help you plan future purchases.
When it’s time to purchase additional equipment, you can see how these purchases will affect your bottom line. You can also see how you need to alter your pricing structure to make up for this added expense.
Without an equipment budget, you cannot effectively plan for future purchases.
You’ll probably have to rely on financing to purchase expensive equipment — most businesses do.
When it’s time to apply for financing, you’ll need to tell your lender exactly how much money you need, what you will use it for, and how you expect this investment to help your business.
Without an equipment budget, it may be harder to secure the financing you need.
Creating an Equipment Budget
Creating an equipment budget is a very important step. Fortunately, it doesn’t have to be a difficult process.
Just follow a few simple steps to get started on a comprehensive equipment budget for your small business.
1. Make a List
First and foremost, you need to create an extensive list of all the equipment you have, the equipment you need, and the equipment you expect to need in the future.
Refer to the “What is Considered Equipment?” section above to determine what should be included in your list.
It’s important to be thorough when making this inventory in order to avoid running into any unexpected costs in the future.
You also need to determine what belongs in your general expenses and what should be considered overhead expenses.
- General expenses should include things like repairs and insurance that are required for equipment used by employees in your company.
- Overhead should include similar expenses for equipment used less often and only by select employees — like the owner’s company vehicle vs. employee vehicles.
2. Separate Your Equipment Into Categories
Next, your equipment should be separated into three distinct categories: owned, leased, and expected purchases.
- Owned equipment includes equipment that you have already purchased and is completely paid off or the equipment you are financing with the intent to own.
- Leased equipment includes any and all equipment that you are renting for business use.
- Lastly, include a category for equipment that you plan to purchase in the future.
Creating these categories will help you keep better track of your separate expenses, and will help you in the future when you apply for financing.
3. Get Quotes
For equipment that you haven’t yet purchased, you need to get quotes from suppliers to accurately complete your budget.
Since getting approved for financing requires you to know exactly how much money you need, it’s important to obtain current and accurate figures that reflect your future expenses.
Contact different suppliers for quotes and compare offers to find the best rates for the equipment that you need.
4. Evaluate the Cost of Operating Your Equipment
As mentioned previously, your expenses don’t end when the equipment is paid off.
You need to account for the cost of operating your equipment. Vehicles, for example, require fuel, insurance, and repairs. Manufacturing equipment will need constant repairs and even replacements.
You also need to consider factors like fixed assets and depreciation.
- Fixed assets are pieces of equipment which you will use to generate income that you do not expect to sell in the near future.
- Depreciation accounts for the decreased value of your equipment over time in case you ever do plan to sell it.
These costs will help you create a more accurate pricing model to help you recover the money you spend on your equipment.
5. Review Your Budget
Last but not least, you need to review your budget.
Ideally, you should review your equipment budget on a monthly basis. You need to compare your budget against your actual expenses and make adjustments to it as necessary.
Budgets are simply an estimate of anticipated expenses. In order for them to maintain their accuracy, you need to consistently review your budget to ensure that it is up to date and reflects your real costs.
Find here more useful budgeting tips for your small business
No matter what industry your small business is in or how large your business is, you need to prepare an equipment budget in order to effectively manage your finances.
As a small business, it can be difficult to find the funds to purchase the equipment you need without disrupting your cash flow.
If this is the case, you should consider applying for a Camino Financial small business loan. Our small business loans are flexible and can be used for a number of different applications, including equipment financing.
What is the first step to knowing if financing the purchase of your equipment with Camino Financial is the best option for you? Use our business loan calculator: it will allow you to quickly estimate the cost of your loan and how much your monthly payments will be. This way you can see if these figures will fit in your equipment budget and thus be confident to make the decision that will grow your business.