When it comes to businesses today, machinery and equipment represent substantial costs. After all, more and more industries and consequently businesses have become machine-intensive, and so it is imperative to manage the finances relating to this if your business is to have a healthy relationship with money. With that being said, in this blog post, we are going to take a look at how you can estimate machinery costs for your company in further detail.
The two different types of machinery costs
These costs can be split into two main sections. Firstly, you have the annual ownership cost. It doesn’t matter whether you use the machinery in question once a year or one thousand times a year, you are still going to have to fund this fee. Secondly, you have operating costs, these differ based on the amount of usage you get out of the machinery. It is important to try and forecast the costs of your machinery in order to help your business run as efficiently as possible and consequently be a success. This article is here to help you do that by revealing all of the costs you need to take into account during the estimation process.
Let’s begin by taking into account the ownership costs. These are also known as fixed costs. They include the following; housing and maintenance facilities, insurance, tax, interest and depreciation. The latter relates to the costs that occur as a consequence of the aging of the machine in question. Essentially you need to determine what the value of the machine is by taking into account the accumulated hours and the age of the business machinery. In order to do this, you actually need to estimate how long the machine is going to last economically and you will have to determine a salvage value for the conclusion of the economic life as well. After you have done so, you can then begin to estimate an annual depreciation.
Aside from depreciation, another fixed cost that has to be considered is the interest. This is only applicable to those who have used a loan in order to buy the machine in question. What is the interest rate you have been charged on the sum of money you have borrowed? You should also add in property taxes on any of the machines as well as the cost of insurance. And finally, calculate how much it is going to cost you in order to house and provide shelter for the equipment in question. When you have worked all of this out you need to add together housing, plant machinery insurance, taxes, interest and depreciation costs in order to get your estimate regarding total ownership costs.
Now you are going to move onto operating costs. These can be slightly more difficult because they change based on the amount of use you get from the machinery and so predicting the level of utilisation plays a key role in getting this right. So, what are the operational costs you will need to try and calculate? Repair and maintenance fees come into play. In addition to this, you can find information regarding average fuel use per acre to help you calculate your projected fuel costs. You also need to try and predict labour costs and lubrication costs. Add all of these together to get your total operating cost. This is something you will need to address over time, as fuel costs become more expensive and such like.
If you take all of the points that have been mentioned into account you will effectively be able to forecast how much your business machinery is going to cost you on the whole. This is essential for the successful operation of your business. It can seem like a bit of a lengthy process, which is why a lot of business owners don’t bother with it. However, if you have this attitude, it will come back to haunt you because you could end up with a machine that is way too expensive for you to handle. You would then have to sell it and get a new machine, and this will result in a good chunk of loss too.
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