Equipment payment to gross sales ratio?

C

Cameron

Location
NJ
Is there a rule of thumb for what percentage payment a company can afford relative to what the company gross is a year.

I had paid off all my loans and there is a good chance I will be moving into a rather large equipment payment. I was curious to see if anbody could answer my question out of curiousity. Looking to make a decision one wsy or another in the next few days. Any help is greatly appreciated, Thanks!
 
I just did the math and my equipment payments are less than 1/10th of annual gross. Granted, this is my first year full time, and I have owned some of my equipment for longer periods of time, but none of it is fully paid off.

I added some $ for older equipment that IS paid off but costs me every now and then in repairs and downtime.

I think my ratio is close, though... A $1,000,000 a year outfit should probably be somewhere under 10K a month in equipment payments, I would think.

-Tom
 
Common sense applies here. There are so many variables that could influence a percentage like that. I'm sure it's different for every company. I used to pay off everything. Now I have debt and cash on hand. In the last few years the banks could care less about the value of the equipment that I have paid off... they just care about cash on hand. With interest rates low it's hard to justify not taking on payments at this point in time.

The one rule I try to live by is to never be upside down in something I have a loan on. That way if I need to sell it and eliminate the payment I can.

You seem to run an awesome operation... I'm sure you didn't get where you are today by making dumb decisions...

What are you buying???
 
Getting ready to pull the trigger on this. Have to put down a non-refundable deposit to hold it. The crane is still being assembled and won't be ready til May. Fine by me, gives me some more time to save up the remaining 20%.
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Are you getting the 90 ton?

Looks like an awesome rig!

The crane market is nuts right now. I have been looking for quite some time. As of October 1st there were 11 cranes on the market that I was interested in. By Nov 15th they were all gone. I didn't move fast enough on any of them.

A lot of US cranes are being bought and shipped out of the country...

I have been trying to pull something off by the end of the year... Not sure it's going to happen...

You are in another league from what I can swing!!! Will you use it solely for tree work or will you rent it?
 
Tom- i think most banks want to see your debt service to be 40% of net or less. I know when i start talking about going to 50% of my net my loan agent tells me to slow down.
I think the key is to think about your net rather than gross. You can gross a million but still lose money. I know managing cash flow this year has been easier because my payments have been about 5% of my gross.
There is a really interesting balance between taking on debt and growth. Buying equipment has definetly allowed me to take on more work and has grown my business. Paying for it isnt always fun.

Those are my 2 cents. This is a great question to ask. Im curious to see others response. Cheers!
 
it is definately not a hard fast formula.you can take on debt based on cash flow,but if you have a contraction that changes everything.obviously new equipment has the ability to open new streams of income so that may figure in as well.
 
Well, I'm one step closer today. Found out my insurance company will write a policy on the truck for around 7k a year (10k deductible). A couple request I found odd and will have to talk to them about.

They want the crane in a fenced in, gated and lighted yard. Which doesn't matter cause it would be in a fenced in area at my property, you would think. (didn't know stealing cranes was so popular???) And they said they will only insure it to do tree work and nothing else. You would think it would be the other way around.
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[ QUOTE ]
Tom- i think most banks want to see your debt service to be 40% of net or less. I know when i start talking about going to 50% of my net my loan agent tells me to slow down.
I think the key is to think about your net rather than gross. You can gross a million but still lose money. I know managing cash flow this year has been easier because my payments have been about 5% of my gross.
There is a really interesting balance between taking on debt and growth. Buying equipment has definetly allowed me to take on more work and has grown my business. Paying for it isnt always fun.

Those are my 2 cents. This is a great question to ask. Im curious to see others response. Cheers!

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Different banks use different rules. I recently had a meeting with my CPA and Banker to understand how our current bank makes this calculation. My CPA now understands... I, on the other hand, am still totally confused.

I have borrowed $ that never should have been lent to me.
I also have been turned down for ridiculously small loans when I had no debt and tons of assets...

I think this subject is totally the responsibility of the borrower. I have never not been able to find someone to give me a loan... but I have been turned down a few times. You know what you can afford and what amount of risk you are willing to tolerate.

Never believe the bank has your interested at hart. Never believe that you can afford something because the bank will lend you the money. Never believe you can't afford something the bank turns you down on. Consult with your CPA if you must. Banks are a necessary evil... evil is the key word there.
 
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And they said they will only insure it to do tree work and nothing else. You would think it would be the other way around.
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I believe that in this case the insurance industry is going by OSHA regs, which are more lenient for tree work, because of overall lack of information and/or ignorance. In this case to the benefit of arborists, bc the regs are much more lenient, which would lead me to believe the ins. industry views the work as 'safer.' This is all speculation on my part based on industry workshops and talking to some other professionals with firsthand info.

-Tom
 
I guess i have a different relationship with my bank. I work with a small local bank both the president of the bank and my loan officer are close friends. They are very conservative. They want to see me succeed and so advise me accordingly.
 
You might find more info under debt service coverage ratio: http://en.wikipedia.org/wiki/Debt_service_coverage_ratio

My experience is that bankers look at the past to make all of their decisions and your goals as an entrepreneur is projecting for the future. These can be at odds with each other and bankers advice will be based on hard numbers, not what you project. You need a venture capitalist for that.

I try to make sure that my current cash flow will cover the new equipment and not bank on the efficiency of the new equipment to cover the payments. The new efficiency is a plus, but if I am wrong it doesn't hurt as much.

PS The crane looks awesome!

Question: I feel like there is a fixed amount of work in my area. Every time that I get more efficient, I have to lower my prices to get more work, which puts me in a cycle of bigger better equipment, more efficiency, lower prices. Same profit with more equipment? Has continually growing your company been worth it?
 
What kind of tree work are you doing to substantiate that size crane and that amount of capital outlay? I would think you would need to have a rather substantial amount of crane service jobs to justify that crane. You look like you already have a nice fleet of cranes that can do a large precentage of your tree work. Your insurance only allowing tree work would be a problem for me. On the jobs your present crane can't do you could hire in a crane many times over for what you are going to spend.
 
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