Fail to plan = plan to fail

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Updated: July 14, 2016

Words / Jon Gibson – For Earthmoving Equipment Magazine

Depending on where you are as you read this article, and the sector of the industry you occupy, the rates you are getting are probably somewhere between 30 to 50 per cent less than were achievable six to seven years ago. The reduced profit margin brings increased pressure on your operating costs and therefore every dollar is scrutinised before it’s spent. Preventative maintenance items are pushed out longer, wear parts are made to run a little further and your budget gets leaner and leaner.

So what is the true cost of skimping on maintenance?

Unfortunately, dumb luck often seems to favour the less informed and unprepared. If you’re anything like me however, Murphy’s Law plays a big part in your decision-making process. If it can go wrong, it does. Often the decision is taken out of your hands when a failure you hadn’t considered occurs. It has been said that you can’t manage a surprise, so it’s wise not to leave things to chance.

You need to have a plan when it comes to managing your machinery. Before you can make a decision on maintenance expenditure, you need to know what your return on investment will be, or at least make an educated assumption. To formulate your plan, you need answers for the following questions: what are the industry rates? What utilisation can I expect? What is the current hour meter reading? What condition is my equipment in? What do I owe on this asset? When will the finance be paid down? What is the expected life of the major powertrain components? What is the cost to refurbish the powertrain components?

Once you’ve established your expected revenue or used historical data to verify it, then taken into consideration all the fixed costs of finance, insurance, depreciation, registration etc., you’re left with the variable costs. These include fuel, servicing, tyres, wear parts, breakdowns and component repairs. Again, using maintenance records and/or your knowledge of the product, break all the fixed and variable costs down into a per hour rate. This is your ‘owning and operating cost per hour’. Deduct the O&O cost from the revenue rate and see what your profit margin is.

Next, by extending or retracting the life cycle, you can make additions or deductions with regards to the O&O costs you must factor in. Run a few different scenarios and see what works best for your business model.

Now you have your optimal life cycle, you’ve established a maintenance budget and you know what you want your return on investment to be, all there is left to do is get working and keep it working. You should keep track of what your true costs are to ensure that the allowances you’ve made are sufficient, ensuring your profit margin is intact. It’s important to note that maintenance expenditure can improve the value of your equipment, but rarely will it be dollar for dollar. Easily visible items such as tyres and undercarriage components will have the most significant effect on actual resale value.

There is however an alternative to all of this strategising and making assumptions, which is a more flexible option with real benefits at tax time. Renting from a reputable supplier.

So, why choose to rent over owning plant? For starters, renting involves far less commitment, which would be beneficial in a scenario where you didn’t know how long you need a machine for. Depending on what sort of agreement you negotiate – hourly, daily, weekly – and the terms of the agreement, arguably you only pay for what you use, and then send it away when you’re done with it. If rental is an option for you, make sure you’re dealing with a reputable supplier with maintenance backing to support their product. You need to know that your hire equipment is as reliable as your own if not better. For advice on the benefits at tax time, talk to your accountant.

Planning doesn’t always ensure that you’ll avoid failure entirely, but at least if you know what you want to achieve, you can identify when your results have deviated from the desired outcome, more quickly. This allows you precious time to react and adjust your approach and either lower your costs or increase your rates. As the old adage states: “If you can’t measure it, you can’t manage it”