Are You Utilizing Short-Term Leverage in Your Company?When discussing leverage for your company, it can be thought of in two forms: long-term and short-term. Long-term leverage could be partnering with another company, licensing a product or franchising. Those types of things are done for the long-term, not in the short-term. Short-term leverage are things that can be done today or near future, designed to save you money in the long run. This article will discuss short-term leverage. People often have one of two views about materialistic things such as cars, computers, furniture, etc. These things are in the low range, relatively speaking, as far as being able to own them. Some people must own things, they want to own their car, their home, their boat, and they want it in their name to prove that it is theirs. Other people do not worry about owning materialistic things, but use leverage to be able to enjoy those same things, often times enjoying vehicles and other toys that are much more expensive than the people who own a vehicle. What does this have to do with business? This mindset often carries over into the business-setting. When starting up a company, partners may use a portion of their start-up capital to purchase outright computers, printers, to stock up on paper, and a company vehicle. What they are missing is that they have just purchased a lot of depreciating liabilities that the company will then have to maintain. They have no leverage. Let’s look at an example. Scenario: To Buy or Lease a Company VehicleCompany XYZ has made the decision that they could benefit from a company vehicle. They briefly weigh the pros and cons of leasing versus buying and ultimately, Company XYZ chooses to purchase a company vehicle outright. They feel really good about the purchase, obtaining a used vehicle a couple years old, but at a good price. After two or three months, something major on the vehicle happens to break. Be it time for that part to be replaced or a freak occurrence, Company XYZ is now liable for the repairs. This liability has now cost the company more than they had planned, forcing it to pay for the repairs plus monthly maintenance and payment fees.Company ABC is in a similar situation as Company XYZ, looking to get a company vehicle. The partners at ABC know that they do not want to deal with repairs and maintenance costs, and have a good idea of how much driving will be done. With that analysis in place, they have decided to lease a vehicle instead of buying one. A particular dealer has great offers on leases of the model Company ABC is interested in. The dealer even offers to pay for all maintenance costs for the first four years or 50,000 miles. Company ABC ends up with a brand new vehicle, a low monthly payment, and all maintenance costs paid for by the dealership. AnalysisWhich do you think got the better deal? Can you see how leverage can benefit a company when used in this way?
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