Understanding the economic lifespan of lift trucks
July 01, 2012
Signing the contract
According to Rhonda Endo, product marketing and developing, Toyota Financial Services, just 10-15 years ago, the local warehouse or operational managers made the buying decisions for purchasing or financing equipment in their areas. They might have been in the habit of swapping entire fleets every so often, as opposed to establishing staggered replacement cycles that are key to cost management.
“Today, customers are moving toward more centralized procurement models that bring a higher level of sophistication into the buying process,” says Endo.
But that doesn’t mean operations should be kept out of the process. Markison recommends operations personnel consult with the CFO during lease negotiations to ensure the customer has a thorough understanding of their obligations, such as return provisions. What is acceptable end-of-term damage? What about overtime, relocation, early termination?
“So many people sign a document without reading it,” says Buckhout. “Lease contracts require more than legal overview. Someone who understands the operation must look it over in advance of signing, and should negotiate with the lease company to ensure a good fit. In fact, if you’re dealing with a leasing company that does not work with you to tailor the agreement, you’re dealing with the wrong company.”
Kipp recommends that lift truck customers expand from local or regional banks to financing companies and specialty lenders, where they will gain more than alternative sources of funding.
“They gain a trusted financial adviser and a valuable ally who can suggest additional leasing scenarios that may offer improved capitalization strategies over the long term,” he says.
When the end of the lease term arrives, Gabriel says it’s generally not ideal to extend the lease, which can often result in unplanned costs. However, lease extensions can also be used strategically, he says, instead of as an emergency alternative to careful planning.
“I’ve seen customers that have gone as long as 24 months defaulting to monthly or quarterly renewals,” says Gabriel. “You should be well-prepared to make a decision at least six months before the lease expires.”
For instance, if utilization were slow over a two-year period of the lease, a 12-month extension might be just the thing to ensure the customer gets value for their money.
Endo predicts the economy will continue to improve, as will customers’ equipment expenditures. Leasing is flexible and convenient, she says, and could remain the ideal choice for many businesses. But now that the traditional three-, four-, and five-year structures have been broken down, what other innovative approaches lie ahead?
In early June, NAACO Material Handling Group formally launched a new product called “Power Advantage,” according to Goodwin. The program features pay-per-hour leases that can be paired with pay-per-hour maintenance. Under the program, the lease company tracks and bills for hours used. Those administrative functions, as well as the risk associated with lease/sub-lease arrangements, are lifted from the dealer’s shoulders, says Goodwin.
This sort of new, more flexible structure resembles a “material handling as a service” model, although that’s currently a term without a definition, says Buckhout. The concept could allow fleets from 1 to 100 to purchase the use of equipment. As far as the customer is concerned, the truck has no serial number and might be new or used. Buckhout says that this approach began in the 3PL industry, which is constantly pushing for more flexibility.
“It is very difficult for even a large company to make a five-year commitment these days,” says Buckhout. “These sorts of tools will allow customer to confidently scale their fleets.”
Buckhout also mentioned some potential changes to the Generally Accepted Accounting Principles (GAAP), the standards for the preparation of financial statements. Though currently in the proposal stage, the new initiatives are designed to put assets back on balance sheets in an effort to make a statement a more honest depiction of the organization.
Currently, many lease expenses do not appear as capital assets on these balance sheets, he says. The ramifications of such a move include a potential reduction in a company’s return on assets, on which some bank loans and employee incomes are predicated.
“These changes could be three to five years out,” says Buckhout. “Those companies that prepare financial statements three years in arrears are likely listening closely, but it remains to be seen how new leasing products will fit into any new standards.”
As leasing structures evolve, attentive forklift customers will likely find themselves with as much flexibility, predictability, and liability as they might like. In the mean time, they can prepare themselves by shedding outdated practices, mining for data, and finding the right business partners for equipment, maintenance, and financing. If they’re lucky, they might be able to get all three from the same source. “After all,” says Goodwin, “Fleet and finance go hand in hand.”
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