Balancing Lease Terms with Flexibility
Leasing is an important financial tool for many businesses. It allows companies to acquire the assets they need without having to make a large upfront investment. But for businesses to get the most out of their leasing arrangements, they need to find a balance between getting the lease terms they need, and having the flexibility to adapt to changing circumstances. In this article, we'll explore some of the factors that businesses need to consider when balancing lease terms with flexibility.
1. Understanding Your Needs
Before entering into a leasing arrangement, it's important to have a clear understanding of your business needs. What assets do you need to acquire? How long do you need to use them? What are your budget constraints? By answering these questions, you'll be able to find a lease arrangement that meets your requirements.
It's also important to consider the impact of the lease terms on your balance sheet. If you're looking to acquire assets that will be crucial to your operations for many years, you may want to consider a capital lease, which allows you to finance long-term assets. Operating leases, on the other hand, are better suited for assets that will be used for a shorter period of time.
2. Negotiating Lease Terms
Once you've identified the leasing arrangement that's right for your business, it's time to negotiate the lease terms. The key here is to strike a balance between getting the terms you need and maintaining flexibility. For example, you may want to negotiate a longer lease term to get more favourable payment terms. However, you'll want to ensure that you have the flexibility to exit the lease early if circumstances change.
Other lease terms that may impact your flexibility include renewal options, termination clauses, and maintenance responsibilities. Make sure to negotiate these terms carefully to ensure that you have the flexibility to adapt to changing circumstances.
3. Accounting for Lease Arrangements
Leasing arrangements can have a significant impact on your financial statements. Under the new IFRS 16 lease accounting standard, most leases will need to be recorded on the balance sheet as a right-of-use asset and corresponding lease liability. This can have a significant impact on financial ratios, such as debt-to-equity and return on assets.
It's important to work with your accounting team to ensure that you're properly accounting for your leasing arrangements. This will ensure that you're making informed business decisions based on accurate financial statements.
4. Retaining Flexibility with Technology
As businesses become more reliant on technology, the need for flexibility in leasing arrangements becomes even more important. Many companies are turning to flexible leasing arrangements that allow them to quickly upgrade their technology as needed.
For example, leasing arrangements that include technology refresh clauses allow companies to upgrade their technology at regular intervals, ensuring that they're always using the latest and greatest technology. This can be particularly important in industries where technology is rapidly changing, such as the IT industry.
5. Considering the Total Cost of Ownership
When considering leasing arrangements, it's important to look beyond the lease terms to the total cost of ownership. This includes not only the lease payments, but also maintenance costs, insurance costs, and end-of-lease costs.
By considering the total cost of ownership, you'll be able to make a more informed decision about the lease arrangement that's right for your business. This can help you avoid unexpected costs and ensure that you're getting the most value for your money.
Conclusion
Leasing can be a valuable financial tool for businesses, but it's important to find a balance between getting the lease terms you need and maintaining flexibility. By understanding your needs, negotiating lease terms carefully, accounting for lease arrangements, retaining flexibility with technology, and considering the total cost of ownership, you'll be able to find the leasing arrangement that's right for your business.