Why Are Capital Equipment Reserve Studies Needed?

Business Planning

A business plan would not be adequate without a proper analysis of the capital equipment requirements of a business. Too often capital equipment costs are calculated only in the present start-up costs and current price levels for equipment. A reserve study provides current cost, projected cost for replacement of capital equipment, a projected timeline for replacement, estimated life expectancies and a recommended funding plan so that future equipment purchases are adequately funded for.

Continued Success and Profitability

So you have a successful business that is moving along, paying down debt, paying the bills and keeping you busy. Now what happens when you have a major equipment failure, how about two or three capital equipment failures all failing within a short time span. How will new equipment be paid for? What Lenders will help out in this current economic environment? How much revenue will be lost and how many clients will you lose?

This is a common scenario for businesses which have had great successes but have overlooked setting up a reserve account, and adequately funding it. A new business and one that has been around for years face different challenges. A business which faces the initial challenges of a start-up must now face the challenges of a growing, aging and persevering. A common reason for business failure is the lack of planning and adapting to these new challenges.

Lenders and Insurance Providers

When financing capital equipment many businesses have difficulties jumping through the ropes of Lenders who have become very strict in their lending guidelines to businesses. With a Capital Equipment Reserve Study catered to your business and the equipment you have or are seeking to purchase, lenders now have a full document which outlines the current and projected expenses as well as a recommended reserve contribution rate for the business’ future obligations. They will be much more apt to providing the financing and have a sense that the business is actually prepared to last and succeed.

When a business obtains insurance on capital equipment there is often a worry that either too much or too little is insured. A Capital Equipment Reserve Study is an excellent source for the insurance provider and the business to have a clear understanding of costs associated with the equipment so that an adequate level of coverage can be set up in the policy.

The Process

Capital Equipment Components Analysis

First a reserve analyst creates a list of the equipment to be included in the study. This will be obtained from the owner/manager who has ordered the study.
Second, a limited scope visual inspection of the capital equipment components is conducted to determine the quantity and condition levels.
Third interviews of the business owner/manager, vendors, employees, industry experts, etc. is conducted.
Lastly, each capital equipment component is given a current condition rating, estimated economic life and estimated remaining economic life expectancy.

Financial Analysis

The Analyst then goes over the current financial situation with regards to the reserve account; has one been established, current balance, interest rates, is the account liquid, etc.

Financial Plan

The Reserve Analyst then determined the expected replacement costs of the components, over the life of the study, to establish the appropriate reserve contribution rate to work towards a funding level that best prepares the business for these expected costs. Current and future reserve contribution rates are affected by factors such as interest rates, inflation rates and component repair/replacement costs.

Formation of the Capital Equipment Reserve Study

The Reserve Study is a culmination of the steps we have taken to come to a well thought out and appropriate financial plan for the business.