Considerations When Deciding Whether to Purchase Practice Equipment
Dentistry is capital intensive. As a result, equipment purchase decisions can significantly affect the financial performance of your small business, both positively and negatively. In this article, I’ll explore some items to consider when you’re looking at buying new equipment for your practice.
Should you buy? Think of three elements when purchasing new equipment: better, faster and/or cheaper.
Better: Will your capital expenditure lead to a better clinical experience for your patients, all else equal?
Faster: Will your capital expenditure lead to a more efficient practice or clinical experience, all else equal?
Cheaper: Will your capital expenditure lead to lower internal operating expenses, again all else equal?
If at least one of these elements moves in a positive direction (and neither of the other two take a step backward), then your equipment purchase can contribute a net positive to cash flow.
Should you finance the purchase? Generally, you should prefer to use cash for smaller equipment purchases (under about $5,000). However, you also want to maintain the equivalent of one to two months of regular practice expenditures as cash on hand. If a cash equipment purchase would throw you off this mark significantly, it might be best to finance it instead to ensure you retain financial flexibility.
When you are facing a particularly large purchase and you choose to finance it, there are several elements to keep in mind:
Term: What is the useful life of the equipment you want to purchase? If you believe a piece of equipment will serve patients for five years, don’t finance it for 10! Aligning the term of the purchase with the equipment’s useful life offers the greatest benefits to cash flow management and capital flexibility. Be conscious that taking accelerated depreciation on financed equipment will misalign the periods over which you receive tax benefits and over which you are paying off the equipment.
Rate: All else equal, go for the best rate. We, unfortunately, have seen dentists utilize equipment loans for small to midsized purchases at greater rates then their existing lines of credit. Allowing competition for your capital (seeking out terms from multiple lenders) will give you the best insight into your options.
Lender: Often the best rate is from the equipment company itself. If you have an equipment need but it is not pressing, waiting for year-end promotions can save you thousands of dollars over time.
In addition, only buy what you need. It sounds obvious, but buying excess equipment or timing equipment purchases poorly can be deceptively easy. Consider the following two scenarios.
Buying for a tax advantage: I have seen situations where dentists have planned inadequately for their tax obligation and, as this becomes apparent, receive some great terms on a piece of equipment that they can depreciate. This generally happens toward the end of the year. What’s not to like about 0% financing, a five-year term, low monthly payments and a dip in your tax bill? These are great selling points if you are in the market for equipment, but terrible if you are searching for tax relief and tying up cash flow on something you don’t actually need.
Buying the latest toy: Does the equipment you are going to purchase actually align with your clinical care? Think of all the general dentists out there with CEREC machines just sitting in a corner taking up space (much like the treadmill in your basement you thought you would use every day but is now collecting dust). Having a “modern dental office” can be a patient selling point. However, not having an operational plan for how to leverage that modern equipment likely will result in poor cash flow.
The market for secondhand dental equipment is thin and highly discounted. There are not a lot of outs if you purchase the wrong equipment. On the other hand, purchasing the right equipment at the right time can lead to an increase in profit and patient growth – if you are thoughtful about aligning your equipment purchases to your desired clinical experience, if you evaluate how purchases can affect your bottom line in terms of quality, speed and cost controls, and if you understand how financing equipment will impact your near-term and long-term cash flow and overall financial position.
This commentary originally appeared September 25 on DentalTown.com
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