Article contributed by John Mahlmeister, COO, Easy Ice
Restaurants and bars face major capital outlays for equipment in order to launch. Not only are these expensive startup costs—most of them are recurring. Owners can expect to face such purchases again and again as equipment is replaced.
Fortunately, business owners can take advantage of new or innovative methods to convert these front-loaded capital expenditures (CapEx costs) to operating expenses (OpEx), resulting in numerous business benefits. One of the vehicles for this is an equipment
subscription.
Why Move Costs from CapEx to OpEx?
Subscriptions have long-since revolutionized business balance sheets. When an asset, such as machinery, is purchased, it is a Capital Expenditure (CapEx). When a similar asset is attained through a subscription, it can be considered an operating expenditure (OpEx). The number one benefit of operating expenditures is they qualify as tax-deductible from the business’s income, unlike capital expenditures.
In addition to tax write-offs, there are other advantages of moving costs from CapEx to OpEx:
- OpEx costs are financially attractive for companies with limited cash flow (common in the restaurant industry).
- When businesses rely on external financing, such as loans, to fund CapEx purchases, they can become over-leveraged.
- If the owner ever wants to sell the restaurant, too much debt can be a deterrent to buyers.
- Unexpected expensive repairs or outlays for equipment replacement affect profitability and cash on hand, no matter how the costs are realized in the accounting. Banks and investors are concerned by erratic profitability, which may affect future funding.
Equipment as a Service (EaaS)
The most well-known business subscription type is SaaS, or Software as a Service. SaaS permits business owners to access expensive software they need by paying monthly, rather than spending up front for pricey boxed solutions that aren’t scalable and may create security issues. As of 2021, the SaaS industry is worth $152 billion.
Equipment as a service, EaaS, presents similar benefits, except that instead of technology security, they offer risk security. Expensive machinery comes not only with a bit purchase price but the need to spend on maintenance and repairs. An untimely major repair that may run in the thousands can easily upset or bankrupt a business with tight financials. When subscriptions include maintenance and repairs in their fee, they eliminate the risk of unexpected costs, allowing for better forecasting and more financial security.
For example, a restaurateur will spend thousands to purchase a commercial ice machine. After installation, it’s only a matter of time until the ice maker needs preventive maintenance, cleaning, filter replacements, and small repairs. Ultimately, one day the ice maker will suffer a major repair or breakdown, temporarily halting production. Expensive repairs or the purchase of a new ice maker will ensue. This continues in perpetuity as long as the restaurant is in business. Furthermore, aside from mechanical issues, the ice machine cannot be upgraded or changed no matter how the business’s needs grow or change.
Equipment Subscriptions Versus Leasing
Another alternative to purchasing equipment is to lease it. Equipment subscriptions are similar to leasing in that they both reduce the capital required to start a business. However, leases almost never have the support or flexibility of subscriptions. A subscription may include equipment repairs, which eliminates the financial blow of equipment failure, as well as preventive maintenance and service. The terms of subscriptions are also preferential to traditional leases; leases commonly charge egregious interest rates and offer no cancellation policy should the business needs change.
If the owner leases an ice maker, the initial outlay is avoided, and monthly payments for the unit may be tax-deductible OpEx costs. However, costs for maintenance and repairs and the man hours required to coordinate them still loom. If the owner signs up for a full-service ice maker subscription, he or she experiences all the benefits of a lease and offloads the hassles of cleaning, service and preventive maintenance, back-up ice, and more. Plus, the ice machine can be upgraded to a larger or different style if business needs evolve.
Is EaaS Right for Your Restaurant?
While numerous other industries are thoroughly convinced of the business sense of subscriptions, the EaaS model is only recently taking hold of equipment acquisition in the food and beverage space. Equipment subscriptions offer most businesses more flexibility and predictability, less risk, and tax deductions, but they aren’t a fit for everyone. Your accountant should be able to help assess if one is right for your business.
