Financial Analysis When Making a Major Purchase
| Publication year | 1991 |
| Pages | 2521 |
| Citation | Vol. 12 No. 1991 Pg. 2521 |
1991, December, Pg. 2521. Financial Analysis When Making a Major Purchase
Analyzing the financial health of a firm is critical before making a major purchase. There are many things to consider when reviewing a firm's financial health. Understanding the factors that make up the financial analysis as well as the alternatives for payment will help firms plan for major equipment, furniture or automation purchases with minimum impact on the firm's finances.
Buying with cash may be the best option for payment, but may not be the best choice when considering the impact on the firm's finances. A firm needs to look at the benefits of financing so that the cash outlay can be spread over a longer period of time. Tax deductible interest payments may work better. However, many firms have found that leasing has benefits too.
There are several leasing options. One is a financial lease. This lease arrangement allows the lessor to recover the full cost of the equipment, expenses and a profit, but may allow the lessee to receive title to the equipment at the end of the lease. Moreover, this choice of payment has less impact on the debt-to-asset ratio of a firm than other lease options. Another lease option is a full equity lease which gives ownership to the purchaser at the end of the lease term. This option still allows the purchaser to declare depreciation on taxes. Alternatively, an operating lease could be chosen, which, for a fixed sum each month, allows the firm to use the equipment. With this arrangement, the lessor does not recover the cost of the equipment over the period of the lease. As a result, it may be the least expensive option in the long run. A major benefit of a lease arrangement is that it is the responsibility of the lessor to pay maintenance costs.
Two major financial statements affected by major purchases are the balance sheet and the income statement. The method of payment will depend on the way the purchase changes the appearance of the major financial statements. This is very important because it reflects the financial health of the firm. Banks and lending institutions rely on these statements when lending money. These statements are also the key documents used in constructing a firm budget and...
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