If a business is going to grow or reinvent itself, it needs funds for larger purchases. When making this decision, one thought may jump to mind: how much will it cost? While this is a key question, there are many factors that go into making important purchasing decisions. To help navigate this process, here are a few questions business owners should tackle before deciding to purchase.
1. Why is this large purchase needed right now?
This is a critical factor because large purchases are an investment in the company that typically takes time to get a return (ROI). There is usually a period where the payment for the large purchase has been made and no new cash is coming into your business to replace the money. As a result of making this purchase, you are taking cash flow out of the business that could be used to pay other expenses or different investments. Therefore, before making a large purchase, it's important to know the following:
- what the large purchase will be specifically be used for
- what critical advantage the business will gain by making this purchase
- why this purchase needs to be made now, instead of later
The time of the year can greatly affect the price when making large purchases. Sometimes, if you can wait until the end of the month, season or year, better deals can become available. Buying during an economic recession in your industry can also mean a lower price.
2. Who should the large purchase be made from?
Whom you buy from is just as important as what you are purchasing. When making a large purchase, the vendor you choose essentially becomes part of your team. Start by researching which companies can provide the product or service that you need. Once the list is established, set up a competitive bidding process by issuing a “request for proposal" (RFP). Remember that competition among vendors can yield better prices, concessions and added service.
3. Are there hidden costs?
Many times, the purchase price is not the total cost of the item. There can be taxes, delivery charges, installation fees and a required an ongoing maintenance contract. Most importantly, extensive staff training may be required to learn how to use the product or service. This can sometimes cost more than the purchase itself and may be the most expensive part of the process.
4. How will the purchase be paid for?
Typically, larger purchases need to be made before the company will get cash from a return on its investment. Companies may not always have enough cash on hand, at the time of purchase, to pay outright on these large purchases. The metal Business Platinum Card® from American Express is designed to help you pay for your B2B purchases and get more rewards to reinvest in your business.
For each single business purchase of $5,000 or more, the Business Platinum Card offers 50% more points (earning 1.5 points per dollar). This benefit can add up to 1 million additional points per year. The multiplier is category and merchant agnostic—meaning it is not limited to any specific category or merchant and can be used for inventory, equipment, supplies and more.
Whom you buy from is just as important as what you are purchasing. When making a large purchase, the vendor you choose essentially becomes part of your team, especially if something goes wrong.
Membership Rewards® points from American Express can be used to reinvest in your business. This can be anything from booking business travel or redeeming points for gift cards for employees to show appreciation. The Business Platinum Card is a premium business-centered product that can evolve with your company.
5. Have you checked with your accountant?
In my experience, many owners do not have a thorough understanding of their finances. Work with your accountant to make sure that your company can pay for the purchase within terms depending on how it was financed. When making larger purchases, ask your accountant to assess your business's financial health by reviewing the profit and loss, balance sheet and cash-flow statements with you. They can assess the risk to your company of making a large purchase at this time. The accountant can also determine if your large purchase may be immediately tax deductible and qualify for special tax treatment for items like vehicles, computers, furniture, equipment and business software. Check the Section 179 deduction that allows up to one million dollars in depreciation of that asset in the year of purchase instead of its useful life.
Too often, once a business owner has decided to make a large purchase, they just go out and buy it right away. However, it is important to not only diligently negotiate the price but determine why the purchase must be made now, which vendor you will get it from and what financial resources will be used to pay for it.
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