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HomemibusinessJustifying Your Equipment Purchase

Justifying Your Equipment Purchase

The latest equipment technology may cost your practice thousands of dollars to purchase. But the returns could make it all worth your while – depending on the finance option you choose.

Purchasing equipment is probably one of the most important decisions practice owners or practitioners make. It should not merely be a financial burden, but should rather make an increased contribution to the practice both clinically and hopefully financially. Thus, it’s important to carefully consider your options when choosing a finance option.

Many practitioners looking to purchase the latest in equipment technology often get stuck on the ‘thousands’ in the equipment cost. However, there is plenty more to consider – “What is the real cost to me?… What is my return on investment?… How do I maximise my return on investment?”

Looking beyond the initial price barrier may present an opportunity to increase revenue and profits.

Many practitioners looking to purchase the latest in equipment technology often get stuck on the ‘thousands’ in the equipment cost.

For instance, let us look at the potential purchase of a new digital retinal camera with a recommend retail price of approximately AUD$30,000 excluding GST. While that seems like a big chunk of your revenue, its important to break it down to see what the real cost is by assessing the various finance structures.

Leasing Option

As a starting point, there’s a lease facility. From a cash flow perspective, lease payments on the camera will cost you approximately AUD$130.00 per week. This assumes the finance is repaid over five years with a 10 per cent residual. If we assume the fee charged by optometrists per procedure is only AUD$50 then the maths is simple, you only need to perform three procedures per week to be cash flow positive.
Should you perform five procedures per week, or one procedure per day, then you are AUD$120 per week in the red or AUD$6,240 per annum. Five procedures per day or 20 per week would mean AUD$870 per week or AUD$45,240 per annum cash flow positive and so on.

The appeal of these figures is heightened because this example does not take into account the assumed full tax deductibility of the lease payment.

Other options

A lease facility is just one option when it comes to financing purchases, hence it is a critical part of cost minimisation to determine the best method of financing the purchase. Your financing options usually consist of a lease; asset purchase, chattel loan or cash payment.

Each of these options is governed by many factors including taxation implications and how quickly the loan is repaid as well as other fees and charges.

In the example presented above, the lease facility works out to be the most cost efficient when allowing for all aspects of cash flow that are associated with the asset (including outgoing cash flow of monthly payments and residual, incoming cash flow of tax relief on leasing payment deductions or through depreciation and interest deductions for asset purchases or loan).

However, when considering a purchase, ensure your financier works through all the options to ensure you have maximised the overall cost benefits of the purchase. Loans vary substantially, so make sure you understand all the tax and cash flow factors and that your financier gives you a choice to suit your personal circumstances.

Michael Fazzolari is based in the Investec Medical Finance Sydney office. He has been financing medical practitioners for over twelve years. At Investec he specialises as a Finance Consultant and plays a key role in developing specialised finance for optical professionals. Michael can be contacted on 1300 131 141.

Charge Out Rates

Many optometrists are still hesitant to charge a fee for service on top of Medicare. Yet the Medicare rebate only covers the basic procedures and does not allow for additional services and high quality diagnostic techniques. Charging above the service fee is worth considering, especially if it means you can justify the purchase of current equipment technology that will better your patient diagnosis and treatment.

Weekly Cash Flow Analysis

*For purposes of calculation, an interest rate of 8.45 per cent has been used. This rate is used as an example only and is not meant to reflect current market interest rates. Lease payments of AUD$130 approximately per week are based on five years with 10 per cent residual. Repayments exclude GST and government stamp duty in the example. Figures do not take into account assumed full tax deductibility of the lease payment. The figures presented in this article are provided as examples only. They are not to be viewed as a form of financial advice. Investec Professional Finance Pty Limited ABN 94 110 704 464 is a subsidiary of Investec Bank (Australia) Limited ABN 55 071 292 594 AFSL 234975 ACL 353 359. Investec is not offering financial or tax advice. You should obtain independent advice as appropriate.