Monday, March 25, 2013

It Makes Sense, Even if you have The Cash

Technology Financing could be The Next Game changer as it will Shield Small and Medium Businesses from The Axe of huge IT Expenditures

Enterprises across the world are leveraging financing and asset management solutions to enable next generation innovation, including better infrastructure, green data centres, grids, health information technology and transportation projects.

At the height of the credit crisis, cash was king. With access to credit, be it scarce, non-existent, or expensive, cash remained the only logical way some companies could purchase critical information technology they needed to remain competitive.  When an IT acquisition became critical, many companies turned to cash, for what they thought was a more cost-effective option than leasing or financing. Ignoring the economic reasons for financing, some companies see purchasing technology with cash as just a simpler way of doing business. However, as many CFOs who have successfully weathered the financial storm can attest, there are significant benefits to leasing that can make financing technology equipment a more viable option than paying with cash. 

Many of us are familiar with the cartoon character Wimpy, Popeye’s portly friend from the television program Popeye, the Sailor Man. Wimpy is famously quoted as saying, “I’ll gladly pay you on Tuesday for a hamburger today.” Essentially what he meant was, that he would like to acquire the merchandise today and put off payment for another day. Because of what economists call the “time value” of money, which is based loosely on projected inflation, the discount rate and what analysts and economists think the cash could earn in other uses in the future, which means it has an opportunity cost.

Wimpy may have had it right.  Financial experts tell us that today’s money is generally worth more than tomorrow’s.  Therefore, a company leveraging leasing to acquire a new data centre or a retail point-of-sale device is actually conserving cash today for its core business, while paying for the technology flexibly over time. This allows the company to align its investment better with the expected/projected benefit and thus ensuring a quicker break even for the investment. From a purely tax perspective, technology leasing also trumps cash.  Every cash purchase made is paid with post-tax dollars.  With an average corporate tax rate today approaching 34%, paying for technology equipment with cash is like adding 34 cents to every dollar that makes up the final price.


Source : IIPM Editorial, 2012.
An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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