How does a small business owner know if the business can afford a large equipment purchase, and when the timing is right?

Billy Bloggs the Plumber and the New Van Decision

Billy Bloggs (not his real name) from Karratha runs a busy plumbing business with one apprentice and his darling wife as his (unexpected) bookkeeper. His work van is on its last legs, it looks like a bomb hit it and he knows it’s time to upgrade. But buying a van is a lot of money, and his wife does the books so she'll know exactly how much he's spending. He's going to have to be practical for this purchase.

How does Billy know if the business can afford it, and when the timing is right?

His Bank Balance is full of Lies

Billy's first instinct is to check his bank balance. There’s money sitting there, so why not just go ahead? It's the way most of us make decisions, for all that logic tells us we should do better. 

However in running a business, Billy also needs to be ready for paying his apprentice and his bookkeeper. The bank balance doesn’t show Friday's debits, nor will it show the forgotten bill from the wholesaler he got those Italian taps from that the customer hasn't paid for yet. Some of that money belongs to the ATO too, for GST and PAYG. What looks like spare cash might already be spoken for.

Reports Can Show the Truth... Mostly. 

Instead of relying on the bank balance, Billy checks his financial reports. His beautiful bookkeeper Annie (thanks darling) moved him to Xero some time ago, and while she's always printed them out for him, he's never really looked at them properly. The van's one backfire away from dying on the side of the road, and he doubts insurance will cover a new van due to age. 

1. Profit & Loss Statement shows if the business is making any money. It shows him that after he's paid the workers (him, his missus and the apprentice) and the super and paid for stuff, he's earning a few hundred a month more than the business is spending. 

2. Balance Sheet shows what the business already owes. Joe can see how much he owes, and whether he should be sleeping at night. He needs to know how much debt he already has before he can decide to add to it! 

3. Cashflow Forecast is the exciting one. He turns to it, hoping that he can buy the van tomorrow... but by estimating income and expenses over the next few months, Joe can see that in the next month that there's going to be a cash crunch if the customer hasn't paid when the bill for those Italian taps comes in. If he is going to do it, it will have to wait a bit.

He sighs, but this also means he will have time to shop around, and make some changes. Surely there has to be a cheaper supplier for high quality Italian tapware after all! Checking deeper into his expenses for a cheaper supplier, he also looks at the prices he is getting for other purchases, and starts to do a little more digging. If he can pay less on bills, he can save more money for the van. 

Billy Double Checks His Work 

On a high from finding cheaper high quality Italian tapware, Billy checks that his bookkeeping is up to date. He checks in with Annie who says she follows this system every Friday. It's Friday afternoon, so Billy knows his details are 100% up to date. 

1. Checks his bank accounts.

2. Checks that GST and Taxes money has been moved to another account. He wants to make sure the figure he came up with is not including some sneaky tax.

3. Finalises payroll and super so this week's paid for

4. Talks with his accountants at Northwest Accountancy for advice and gets told about about the depreciation benefits for his new van. 

He realises that there's a number of new suppliers for a lot of his materials. The digging around is really paying off. With new suppliers he might be able to save even more money, and build the deposit fund even bigger.

When Does Billy Buy His Van? 

Surrounded by the reports covered with scribble, Billy realises that he has enough to put down a deposit now. However, the current month is a quiet month, and next month will start picking up, a trend he knows from years as a plumber and that he can see clearly in the new Xero analytics charts. Next month he will be able to afford the repayments more easily and any down payment he can save right now will reduce future payments interest. It makes more sense to schedule the purchase for next quarter.

He talks it over with his bookkeeper over snags and mash for dinner, and she agrees this makes sense. A small fund is set aside in case of repairs, but he's confident the old van will last another couple of months. Knowing that he's now planned out the upgrade to the best of his ability, he sleeps better and feels confident that everything is going to work out. It's in the calendar, and all possible problems have been identified and planned for. 

Final Thought

Like Billy , many small business owners rely on the bank balance to make decisions. But the real answers are in your financial reports. Accurate bookkeeping, regular checks, and simple forecasting turn big financial decisions into confident choices. Simple accounting habits every week can keep your finances elegant and understandable, and reports showcase different aspects of your business. Knowing when to use information from each report, and what they mean, is something anyone can learn. 

If you, like Billy, are considering a new van purchase, but not sure yet if you can afford it, give us a call and we can talk you through some of the key decision making factors.

Northwest Accountancy Pty Ltd

08 91859400

[email protected]