Capital preservation is more important now than ever – find out how it can benefit your business today
Capital preservation: what is it?
Simply put, capital preservation is all about keeping your business’s money in the bank by reducing expenses that don’t directly bring in revenue. One tried and tested capital preservation strategy is adopting an opex business model, which is the main approach we’ll be discussing here.
Capex vs Opex model:
- Capex (or CapEx) = Capital expenditure. This involves using capital (or credit) to acquire portfolio assets like real estate, which then need to be maintained at your own cost.
- Opex (or OpEx) = Operating expenditure. These are recurring costs that you incur to keep your business running day by day.
While there is some overlap between the two, and you can’t really avoid either altogether, aiming to reduce capex during challenging economic times makes sense for a number of reasons.
Which way you choose to finance your tech assets can have a major impact on your business bottom line. Here we’ll show you how and where you can take advantage of capex savings (and even tax savings) when it comes to your IT infrastructure.
Capital preservation during the COVID-19 outbreak
Apart from its devastating impact on people and communities, the SARS-CoV-2 pandemic has placed enormous financial strain on businesses large and small. At Hire Intelligence, our experience with the Global Financial Crisis of 2008 showed us that many businesses will find it beneficial to put a freeze on capital expenses (CapEx) and instead look to rent equipment using their operating expense (OpEx) budgets.
During this difficult financial situation, it’s our goal to help your business find the best ways to serve its customers; and assist your employees in remaining productive when the workplace has changed dramatically. With reduced or less reliable income, shifting to a tech rental model is a wise capital preservation investment.
Rather than turning to lenders or acquiring debt, it’s our hope that Australian businesses will direct their capital investment toward revenue-generating activities, and rent their IT needs from us.
The benefits of capital preservation
During any financially turbulent time, capital preservation is a smart move. This is especially true when it’s uncertain how long the market may take to recover. We believe that our opex model solutions can help you improve your bottom line and cash flow, and that switching to tech rentals is one of the best investments for capital preservation you can make.
Advantages of taking an opex approach to your tech:
- Tax deductible: unlike depreciating capex equipment, opex are fully tax-deductible in the year they are made
- Flexible: easily cut your monthly spend by returning any assets you aren’t using
- Fast: cut through the red tape and lengthy lead times normally associated with getting approval for capex
- Avoid obsolescence: technology changes incredibly rapidly these days, and upgrading all your equipment every few years is a major headache – and an expensive one at that. Our flexible service allows you to rent the very latest devices and equipment for up to 12 months, or lease for longer terms between 24 to 60 months, whichever best suits your needs.
All these features in turn ultimately help you boost your company’s bottom line profit and reduce capital loss.
Strategies to reduce capital expenditure
The overarching goal in reducing capex in favour of opex is replacing hefty upfront costs with smaller, predictable monthly fees that you can easily control and budget for. When cash flow is tight, capital preservation is the best way to protect your company’s bottom line.
The simplest way to realise capex savings is by renting or leasing in favour of purchasing – especially when the asset involved is not directly involved in revenue generation, or requires regular servicing or maintenance.
Outsourcing tasks to freelancers rather than hiring new full time staff is another example of a strategy that can be used to reduce capital expenditure. And to further increase your bottom line, non-revenue-generating portfolio assets can even be sold for cash.
Tech rentals: an easy solution for capital preservation
Firstly, let’s examine what your IT infrastructure might look like under a capex model. Taking this approach means buying sufficient equipment to handle your business’ maximum workload.
If that only happens once a year (because you’re a retailer with a big Christmas sale, or a tax agent doing your clients’ returns before deadline submission, for instance) most of your on-premises equipment will sit idle the rest of the time.
And just because those systems aren’t in use now doesn’t mean they’re not costing you money. They still need to be depreciated, maintained, powered and – when the time comes – upgraded. In reality, most businesses have very low hardware utilisation rates because of the excess capacity required to handle peak demand. As a result, they tend to spend much more on computing than is actually required.
Now let’s look at the alternative – the opex model. When you rent your IT equipment, the above scenario never has to happen. Resources can be provisioned and de-provisioned with minimal notice, as needed, and without an exorbitant cost attached. This means your IT infrastructure can scale up and down quickly and efficiently according to your business’s needs and financial situation.
Your costs are now fixed, predictable and tax deductible – no matter the market conditions. In addition, you don’t need to worry about your equipment becoming obsolete before you’ve even had a chance to recoup the purchase price.
Sound good? Let’s talk about how we can help your company transition to an opex model for your IT!
What is the difference between the capex and opex business models?
The capex (capital expense) business model focuses on acquiring assets and purchasing new hardware and software licenses up front. Capital expenses appear on your balance sheet, and can place a major strain on your IT budget, especially during market volatility.
The opex (operating expense) business model aims to free up these funds so they can be allocated to other areas of the business. This is achieved by opting for ‘product as a service’ offerings wherever they are effective – such as leasing up-to-date equipment which includes servicing and maintenance. This allows you to bring in higher income with less cost.
Why is the opex model better for my business right now?
We live in unpredictable times – and that’s when predictable costs are at their most valuable! The opex model also enables your business to operate in a more agile and flexible manner, which is extremely useful in tough economic times and unfavourable market conditions such as unstable inflation.
Is capital preservation more important now during the COVID-19 outbreak?
Absolutely. The economic ripple effects of the pandemic will likely be with us for some time, and making major capital outlays should be avoided unless absolutely necessary. Depending on your investment objective, avoiding capex is advisable.
How does reducing capital expenditure improve my bottom line?
Reducing expenses is the simplest way to a healthier balance sheet, and adopting an opex model is the fastest way to accomplish that. Hire Intelligence can help your business reduce capex and increase your bottom line through cost-effective IT and AV equipment rental, which you can fund through your opex budget.
Can the opex model help with my business’s cash flow?
Yes! When cash flow is constrained, the fact that you can deduct the total cost of an opex item in that tax year can be extremely beneficial. In contrast, capex costs can only be recouped over time through depreciation.
When forecasting my opex budget, should I focus more on renting or on leasing?
This will depend on the nature of the products or equipment you’re using, but renting generally refers to short-term contracts, and leasing for longer-term contracts. In the case of mechanical equipment with an extensive lifespan, leasing would make more sense both from a practical and budget perspective. In the case of high-tech devices, renting for a shorter period which allows you to upgrade after a year or two is probably your best option.
Post coronavirus, how easy will it be to access capital expenditure?
Unsurprisingly, these turbulent economic times are likely to make it harder for businesses to justify large capex purchases to their boards. The same will apply for companies seeking equipment financing through financial institutions. For the time being, lenders and stakeholders can be expected to remain justifiably cautious before they fund capex. This is yet another reason businesses should prioritise capital preservation.
Get in touch with us, and let’s discuss how our tech rentals can help with the capital preservation of your business today!