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How to Calculate Your Total Cost of Business Equipment Ownership
Understanding your machine’s total cost of ownership is critical to knowing what you can afford. However, it can be complex for small businesses to calculate due to factors like fluctuating maintenance costs, varying financing options and the need to account for both direct and indirect expenses over time. Cat Financial offers tools to help you calculate the cost of ownership and strategically expand your business. Let’s explore how to accurately calculate your equipment costs.
Estimated read time: 2 minutes
Calculating Total Cost of Ownership
Total cost of ownership extends well beyond the machine’s initial purchase price. Ownership costs and operating costs are both determining factors. Let’s look at what each cost includes and how they differ. Understanding these different costs is necessary to knowing how much investment you can make in new equipment.
- Owning costs include the purchase price of the machine, financing, taxes and the disposal price, which is what you get for your machine when you resell it.
- Operating costs encompass labor, fuel, maintenance, replacement items like tires and tracks and overhead. It’s also important to consider how unplanned downtime can increase operating costs by leading to lost revenue.
By carefully analyzing both ownership and operating costs, businesses can make more informed decisions, ensuring they select equipment that provides long-term value and aligns with their budgetary constraints.
Factors Affecting Profitability
Did you know that the purchase price of a machine has the lowest impact on your overall profitability? Look at the seven primary factors that affect your profitability, from most impactful to least impactful.
Productivity: This refers to how much work your machine accomplishes in a given period. Improving productivity can lead to significant gains in output and profitability.
Availability: This is the percentage of time your machine is operational versus in the shop for service or repair. High availability ensures that your equipment is ready to work when you need it.
Operating Costs: These include fuel, labor, maintenance and replacement costs. Efficient management of operating costs can substantially affect your bottom line.
Utilization: This measures how often you use your equipment. Maximizing utilization can increase your return on investment and spread costs over a greater number of projects.
Resale Value: This reflects the amount you can recover when you dispose of your machine. A higher resale value contributes positively to your overall financial health.
Interest Rate: While a low interest rate may impact your up-front costs and monthly payments, it is the second least impactful factor in determining the profitability of your machine.
Purchase Price: While important, this is often the least impactful factor in determining the overall profitability of your machine. Buying less expensive equipment may save upfront costs, but these savings are lost due to lower productivity, availability, operating costs, and resale value.
Understanding these factors and accounting for how they impact overall equipment costs is necessary when creating a realistic budget. And these small costs can add up when it comes to total cost of ownership. For instance, a 1% improvement in productivity has over five times the impact on total cost of ownership than a 1% change in purchase price.
By focusing on enhancing these key factors, small businesses can make informed decisions that boost profitability and ensure long-term success.
A 1% improvement in productivity has over 5X the impact on total cost of ownership than a 1% change in purchase price.
Here’s How Cat Financial Can Help
Total Cost of Ownership Calculator
First, check out the total cost of ownership calculator. This easy-to-use tool allows you to enter everything from machine type, purchase price, various operating costs and even resale value to quickly calculate your machine’s lifetime total cost of ownership.
Caterpillar’s Value Simulation Tool
For a more detailed view of your total equipment costs, your Cat® dealer can help you use Caterpillar’s Value Simulation Tool (VST). This tool provides a more in-depth view of ownership costs. It factors in application, idle times, load size and much more.
The VST can help guide decisions like buying new versus rebuilding. It will even show how services such as a Customer Value Agreement (CVA) and Equipment Protection Plan (EPP) can improve your utilization and overall costs and productivity. To learn more, contact your local Cat dealer for access to the VST.
Flexible Business Equipment Ownership Options
Cat Financial offers many other resources and financing options based on your specific need, including the Cat Card for a flexible, unsecured line of credit for parts and service. For more information, check out this handy comparison guide showcasing Cat Financial options.
Don’t take chances on your equipment costs by playing the guessing game. Instead, take steps to understand your total cost of ownership and learn more about all the Cat Financial financing options available to support your small business.
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