How to Plan for Major Purchases as a Small Business Owner
Making a big purchase for your small business is always a stressful decision. It can feel like a leap of faith. Should you expand? Should you upgrade your equipment? Will the changes and enhancements you make to your business pay off? Even considering hiring a new employee raises similar questions. What can you afford and when?
I always get stressed thinking about spending. It can feel risky. The future is never guaranteed and it’s hard to predict if success today will continue into the future.
I’ve found a great way to mitigate the risk of making a big purchase, though. With thorough planning and time spent running the numbers, I can sleep better at night, knowing that while I may be taking a risk, it’s a calculated risk.
Why you should plan before making a large business purchase
A solid plan and financial forecast is the key to making a smart decision about a major purchase for my business. Planning helps on multiple fronts:
Justify the purchase
Typically, major business purchases are related to expansion. A new piece of equipment or additional office space is part of a growth plan where the additional spending will generate additional revenue. A plan for the future will show both the financial impact of your spending, but also the expected return on investment. The plan will help you determine growth targets that you’ll want your business to hit as you expand.
A plan can also help you avoid costly mistakes. With a plan, you might find that it will take too long for your purchase to pay for itself or that other changes you’ll have to make in your business will be too costly. A new major purchase may also impact the timing of future revenue or impact other planned expenses in ways you had not considered before putting your plan together.
With your plan, you could consider alternatives to your original purchase idea and explore other ideas to help achieve your goals.
Be prepared for unforeseen expenses
Major purchases often come with additional expenses that may not have been totally clear when you made the purchase decision. You might need to invest in additional training for new software or make other changes to your business as a result of the new processes that you have to introduce. You should also make sure to consider other miscellaneous expenses such as taxes, delivery and maintenance fees, and other surcharges.
When you create a plan, you can include a financial buffer so that your business can absorb unplanned expenses as they come up.
Know the right time to make the purchase
Timing can be everything in business finances. If your business has seasonality, there will be times when your business has more cash on hand and other times when cash may be a bit tighter. Having a plan in place gives you these insights and helps you predict when the best time will be to make a new purchase, helping prevent you from a potential cash crunch.
Know how you’ll pay for your purchase
Planning also helps you understand the best options for paying for a major business purchase. If you are going to take out a loan, a financial plan will help you understand how the loan payments will impact your business finances. If you plan on paying cash, your plan can help you understand what kind of impact the purchase will have on your finances and if it will impact other planned spending.
Questions to ask before making a large business purchase
In addition to making a plan for your purchase, there are questions you should ask yourself before you dive in so that you have thought through everything you need to before you make your purchase. Here are a few vital questions you should ask yourself as you develop your plan.
1. How will this fulfill the needs of my business?
Sometimes it can be tempting to upgrade to the latest and greatest equipment for your business. But, before you take the leap, make sure that your purchase will help you reach your growth goals.
If you’re looking at purchasing new equipment or new software, make sure that you’ve talked to the employees that will be using the new tools. What do they think? What are their primary needs and what problems do they face today? Will your purchase solve their problems or increase productivity?
2. What does it really cost?
With most new software, equipment, and tools, the real cost is much more than just the purchase price.
When you are considering a big purchase for your small business, make sure to factor in additional costs that your business will have to bear. There will be training time for employees, lost opportunities and work time during installation and training, and potential maintenance and future repair costs.
Any many scenarios, it will take time for you to be back up and running at full capacity and so it will also take time for your new purchase to start adding to the bottom line.
3. How will I pay for this expense?
Of course, any new purchase needs to be paid for. Are you going to pay cash? Perhaps you plan on getting a loan.
Either way, make sure your business can handle the outflow of cash or the ongoing loan payments. This is where having a good financial forecast in place will be a big help.
4. What other factors should I consider?
As with all purchases, you’ll need to consider who you’re purchasing from and what kind of relationship you have with them. You’ll want to have a good understanding of the kind of customer support that you can expect to receive from your supplier as well as any warranties that are available.
From a timing perspective, you may want to consider the timing of your purchase to determine if any rebates or discounts are available or may be available in the future.
5. What is the necessary return on this investment?
With any large purchase for your business, you’ll want to consider what kind of increase in business you’ll need to have to justify the expense. Again, having a financial plan will help you figure this out. You’ll most likely need improved revenue and eventually improved profits. A financial forecast will help you figure this out in addition to the timing of these changes to your business finances.
How to prepare for a large business purchase
Investing in your business by expanding, adding new equipment, or upgrading software is an exciting time. It can also be stressful as you try and figure out how it’s all going to work. Having a solid plan will help you streamline the process and ensure that your business has nothing but a positive impact from a significant new purchase. Here’s what your plan should include:
1. Define your objectives
Writing down your goals for a new, large purchase for your business isn’t just about clarifying what you personally want to achieve. It’s about making sure that your entire team understands and is on the same page as you. With a new major purchase, having your team onboard will help everything go smoothly as you make changes. With everyone pulling together in the same direction, you’re more likely to succeed.
Your objectives should cover your financial goals, changes in productivity that you expect, and any other business outputs you plan to achieve. That could include improved customer service or a more streamlined process. Put systems in place to measure how things are going before your purchase so you can see the impact as your business changes.
2. Establish a transition timeline
With your goals established, you need to create a timeline for implementation. You’ll want to establish a roadmap for the evaluation and purchase process, a procurement timeline, and an implementation timeline.
The implementation may be the most important part of the plan if you are replacing an existing piece of equipment or changing business processes. You’ll want to account for time to train your staff and also come up with a plan for handling potential disruption to your customers as a result of implementing new systems and processes.
If a new piece of equipment or new software will result in downtime for your business, you’ll want to think about a communication plan for your customers and manage their expectations so that you meet their expectations without chasing them off to a competitor.
3. Set a budget
Beyond the sticker price of the item that you’re purchasing for your business, make sure to create a budget that covers all of the other expenses that we’ve talked about in this article. Your budget should include any additional fees, such as delivery and installation, training, maintenance, and any other add-on services are parts that you may need. Thinking about all of these things up front will help you create a solid financial plan that gives you a clear picture of your business and how a major purchase will impact it.
4. Create a cash flow forecast
Any significant purchase for your business will impact your cash flow, even if you are relying on a loan or line of credit to make the purchase. Of all the budgeting and forecasting that you can do for your business when you’re considering a major purchase, your cash flow forecast will be the most important. It will tell you when is the best time to make your purchase and how the purchase will impact your cash moving forward. Cash is the lifeblood of all businesses, so knowing how a significant purchase will impact your cash situation is crucial for business growth.
You can learn all about cash flow forecasting in our cash flow guide.
Take your time when making large business purchases
When you’re contemplating a major purchase for your business, taking the risk out of the equation is the most important thing you can do. Proper planning is one of the most effective ways of reducing that risk while also reducing any anxiety you may have about investing in your business. Take the time to do things right and you’ll find that a major purchase will have a major positive impact on your business.