Just because you can afford to pay $1,500 a month for a truck payment or $1,200 a month for a piece of equipment doesn't mean it makes financial sense to actually do that. Before you go out and spend $60,000 on a new piece of equipment, $80,000 on a new truck, or $50,000 building out a showroom, have you actually done the math to determine whether it's a good investment? Too many contractors make major purchases based on emotion, convenience, or what they think will happen instead of looking at the actual numbers. Today we're going to walk through three questions you should ask before making any major business purchase. And then I'll give you two real-world examples of how to calculate whether an investment actually makes financial sense. Hey, welcome back to the show. I'm your host, Brad Hebner. I'm a licensed general contractor, author of the Contract Your Profit Blueprint, business coach to overwhelmed and stuck contractors who want to boost their profits and regain their freedom by showing them how to charge what they're worth. Now, you want to make that major purchase, right? You want to buy that new vehicle, piece of equipment, invest in a showroom, whatever it is, you think this is going to quote change the game for your business. Now, this is this topic actually comes from one of my uh clients. It was a recommendation because they're right in the middle of trying to make a decision like this. And so this happens a lot. I talk to people that have, you know, I look at their PLs. Whenever I work with a new contractor, I always have them send their PLs in. We look at it, they're, you know, what they got going on, their balance sheet, all that stuff. And more times than not, there's a lot of equipment that's not being utilized correctly, or they've invested too much money and now they're, you know, they're in over them over their head. And so now they're like, they have to catch up because they bought this equipment thinking it's going to, you know, do something that it actually did not do. So there's three questions that you need to ask or answer rather before you make a major purchase. So number one is what's the true cost? Purchase price, financing, interest, insurance, maintenance, additional overhead, all the stuff that goes into it. It's really easy to say, oh, this cost X amount per month for the payment, and then not calculate anything else into it. So what's the true cost and factor in all of it? What's the return? What's the actual return it's going to get? Will it increase revenue? Will it generate additional gross profit? Will it reduce expenses or will it save on labor? Right? There has to be some type of return other than, well, it's frustrating to rent equipment all the time. That's not a valid reason to buy anything is because you're just frustrated buying it. There has to, it has to make mathematical sense, right? And then lastly, what's the break-even? How long until the investment pays for itself? And what happens if you only get half of your expected return? Now, a little uh forecast or hint here like half, you know, getting a return or half of return on your investment, a 50% return on your investment is like the minimum requirement you should be basing it on. Too many people expect everything to go perfectly. By the way, side note, this is why all your estimates always come in short, because you're bidding jobs perfect and they never come in perfect. You have a 10% chance of it coming in perfect, yet you bid 100% of your jobs with perfect execution, right? So there's a little tip into uh everything you do in your business. Something to keep in mind here, just because you can afford a monthly payment, just because you can afford to pay $1,500 a month for a truck payment or $1,200 a month for a piece of equipment or whatever it might be, that loan, capital loan investment, doesn't mean it makes financial sense to actually do that. So you do the math and figure out what the ROI is. Just because you can afford something doesn't mean that it makes sense to actually do it. Right? So here's here's example number one. You want to buy a Skid Steer. Now, you can replace this with any piece of equipment, but I got some numbers here just to kind of go through this. And are they gonna be exact in your area? No. I mean, guys, just because it doesn't match your exact formula, like let's use our brains here a little bit. Okay, I get hate all the time. Well, I don't have to pay that much. My my monthly rental is cheaper than that. Great. Insert your numbers, it doesn't matter. It's an example. I don't know why I even have to say this. Every time I get people arguing, well, that's not that's not for me. It's an example, guys. It's not it's this isn't real life. This is an example. All right, purchase price for Skid Steer, uh $58,400, right? Call it $60K, whatever. Your down payment, assuming you have the money, $10,000 down. You finance $48.4 at 7% interest for 60 months. Your monthly payment is approximately $958 a month. And then you add in your insurance, maintenance, and storage. If you have to pay for it, let's estimate it's $450 a month. Your total ownership cash outflow is approximately $1,408 a month. That does not include gas, by the way. Right? So, like you have to factor in that as an additional. But your gas typically should be as a cost of goods for the job. So if you rent it, if you're renting a piece of equipment right now, it's roughly between $2,300 to $3,000 a month if you do a monthly rental on a piece of equipment. So the question here is how many months a year would you need to use this piece of equipment to justify the cost or to break even? So based on the uh $1,408 per month cost, it ends up being $16,900 per year of ownership cash outflow, right? So let's just round it to $17,000. You're gonna spend $17,000 a month, I'm sorry, a year to own this piece of equipment. Again, not including gas or you know repairs. So if you rented a piece of equipment, it costs you three thousand dollars a month. So at two months, it's six thousand, three months nine, so on and so on. You would need to be you would need to essentially use the piece of equipment approximately five point six months out of the year. So let's round it up to six months of out of the year. So you would need to be using that equipment at least six months out of the year just to essentially break even on the cost. Anything over six months, now it's saving you money. Right? If you use it eight months a year, that's 24k, it's saving you know significantly amount of money. If you're using it all year round, even more. So using math here in these formulas, uh, we would need to use this at least 5.6 or 6 months out of the year in order to make it make sense financially. Right? If you're if your rental is only $2,300 a month, then you have to you have to use it approximately 7.3 months, roughly seven months out of the year in order to make it make sense. Right? If you only expect to use it three or four months out of the year, then it does not make sense to own the the Skid Steer. It just doesn't make sense financially. Right? So after five years, the thing to keep in consideration is that after five years you own the machine, so now you have actual capital that you could sell the equipment for and make money back, right? This isn't taking all of that in consideration. We're just looking at it from a mainly a cash flow perspective, but as a return on investment, does it make sense? So the key point here is don't buy equipment based on how often you hope you're going to use it, you need to calculate how often you'll actually use it, right? And like I said, this doesn't take into consideration like the 10 $10,000 down that you put, uh, you know, resale value, all that depreciation, it's not taking that stuff into consideration, although you certainly could add that into the formula. If it doesn't make sense simply on how much money you're saving from like a rental perspective, you don't even need to calculate the other stuff because it doesn't even make sense. Too many of you, like, man, I really I hate renting equipment. It's just such a pain in the butt. I want to go buy my own skid steer. That is not a good reason to buy a good skid steer. If you're like, well, if we have a skid steer, then we're gonna use it more often for more things. Really? Will you? Because what I know happens is whenever you have to go dig three hose, you know, in the ground and say you have an auger attachment, most people aren't gonna roll their, you know, their skid steer out, unload it, use it to dig three hoes. They're gonna do it by hand, doesn't make sense. If you're gonna dig 50 hoes for a fence, yeah, you would bring out your skid steer. But there's times where you think you're gonna use it every time, it now becomes annoying to have to haul this piece of equipment out, find a place to park it on a busy street where you don't have room. You gotta, you know, then you gotta drop it off and go park it, you know, three blocks down the road or whatever. It becomes now an annoyance of using the equipment. So, like in our mind, oh, this is gonna be awesome. I'm gonna use this for everything. I'm gonna have every attachment possible, and it's really gonna make everything so much easier. That's not usually what happens. Now, is there obviously having equipment makes everything a lot easier? There's no argument there. It's financially doesn't make sense, and we use it based on half usage. So just because you think you're gonna use it all the time doesn't mean that you're actually going to use it all the time. So use real math to make this decision, is the point of this, right? Not emotions. I mean, that's that that's basically it. Like you use real math. Okay, so example number two, this is what I was talking with my client about. You want to invest in a showroom. Maybe you have a location, you have an office, a building, um, you you know, you want to turn it into a showroom, maybe you want to add on, maybe you want to buy an office building that you can use as a showroom. It doesn't really matter. In this scenario, we're gonna say you have equip, you have the showroom or you have a building already, you have space, but you're gonna turn it into a showroom and you're willing to invest like $50,000 to do this. This is different because the math here is not as clean as, you know, renting a piece of equipment. So, what's the numbers? Let's say the showroom build-out and displays are gonna cost you fifty thousand dollars. Maybe you can get your, you know, let's say it's a kitchen showroom, maybe you can get your vendors to provide the cabinets for the showroom, they'll pay for it. You get your countertop people, they'll pay for it. You could save some money, and I would recommend doing that. But let's just say your total out cost is fifty thousand dollars. What you don't take in consideration a lot of times is what's the additional cost? If all of a sudden we have a bunch of extra lights in there, uh, is that gonna increase our electricity? Probably. If we have more people coming in and out of the door, does that affect the temperature in the building, which means your equipment's got to run more often? Yes. So, like your utilities can actually increase simply by adding the showroom, right? So, I mean, and and then insurance. Like now all of a sudden you got to increase your insurance to cover it potentially, because you have more uh liability and more things there to cover. That can increase your overhead, you know, by $2K a month. Now, again, these are just rough numbers, not saying it's exact, but your uh additional annual overhead, if you do increase it by $2K, is now $24,000. So that $50,000 initial investment could potentially increase your annual overhead by $24,000, right? So your total uh investment in one year would be like $74,000 in the first year. Now, let's say your average kitchen remodel is $75,000 at a 50% gross profit. That means your gross profit per kitchen is $37.5, right? Again, gross profit, not overhead, gross profit. So how many additional kitchens would you need to be able to sell using your showroom to make it worth the investment? So uh if you don't add any additional kitchens, you couldn't make any money, you lost money, right? If you sold one extra kitchen per year, then that's a $13,500 additional uh benefit. It's gonna take you 3.7 years just to pay for that showroom. If you sell an additional three kitchens a year because of the showroom, that's $88.5. It's only gonna take you seven months to recoup your money. What's harder about stuff like this is that there's no guarantees. Like you could invest all this money and it doesn't benefit you whatsoever. There's not real hard cost that you can track. You know, did someone buy from you simply because you had a showroom, or they were gonna buy from you regardless if you had a showroom, but you contributed to the fact that they bought from you because you had a showroom. Unless you specifically ask that question and track that data, you're not gonna know, right? There's there's lots of unknowns that go into this. Now, I will tell you just from in general, like having a showroom does add a level of legitimacy to your business. It also makes your processes much easier. So now you can factor in like an efficiency rating. If people are coming to you to do all the design and all of the selections, then that saves you time and energy, right? So like there's an efficiency uh reduction there. But it can you really track that? Like how many hours you spend? Like if you really had all that data, you could, but it gets a lot more messier with stuff like a showroom. So things to consider you know, will a showroom actually generate additional customers or increase your closing percentage? Like I said, can it increase the average project size or gross profit? So now you add in, we'll say our average ticket's 50K. Now, because we have a showroom, we can show them some fancy, you know, gadgets and all this whizbang stuff. Now they want to add an extra 15k per project because they have they can see it now, they like it. So that that generated an additional $10,000 to $15,000 per project, right? So that can increase the average project size. What if you only sell half as many kitchens as expected? How does that that's that half equation? Could you accomplish the same result with a smaller investment, right? So a showroom doesn't automatically make you money, and this is why this one's challenging. Hey, just a
