By Peter Hanson, CSA Waverley
In this tough economic climate, there is increasingly less available cash for essential IT purchasing. Faced with corporate belt tightening and costly challenges such as green compliance, organisations must look at best value, sustainable and responsible, IT purchasing — whilst freeing up their cash flows. When budgeting, these are all targets that should be set — so the right price is being paid, for the right solution.
The availability and use of current IT equipment is an essential element of any successful operation in today’s world, and like utilities, it is increasingly being viewed as a normal business expense - rather than a capital acquisition. Budget hit operations, particularly in the public sector, are increasingly looking at new ways to purchase IT equipment without using capital expenditure.
One area that is becoming increasingly popular in helping facilitate technology procurement, is sale and lease back of IT assets. This is a well known and utilised tool in the management of cash, the drawing up of balance sheets and the requirement to avoid capital expenditure.
Sale and lease back is a mechanism where operations are able to simplify their acquisition process, by treating IT equipment, especially the desktop, as a necessary operational expense - along with the stapler, phone extension or, pencil. One good practice solution is to acquire IT equipment directly over a period of new technology rollout and on full implementation, employ a sale and lease back agreement to fund this.
This approach involves supplying the leasing partner with the invoices paid for the equipment, agreeing a lease period and rate and start date. The organisation then frees up the cash tied up in the assets and has a manageable expense to pay each month or quarter. The leasing company now owns the assets which can be returned to them at the lease expiry or when the organisation finds a more advantageous solution to its IT requirements.
Local Authorities, Universities and NHS Trusts are good examples of exponents of this route to IT equipment acquisition. They need to balance budgets, needs, regulation and cash. Having acquired the equipment in line with the needs of the operation, they will finance the acquisition, but only with a view to then converting the capital into a business expense - in line with their budgets.
The length of lease or leases will reflect the life of the equipment — perhaps 3 years for desktops and printers and 4 years for networking infrastructure. The type of lease will reflect the needs of the operation — a fully compliant operating lease is the chosen instrument for most public sector bodies but there will be occasions when a finance lease suits.
Most reputable leasing companies offer public sector operations such as NHS Trusts, approved leasing documentation that satisfies sale and lease back transactions, end of lease options and operating lease compliance issues.
However, sale and lease back will not solve a poorly run operation’s cash flow problems as this type of operation will not attract the financiers to engineer a solution. Neither is it a way to sell off obsolete assets, as these are likely to be redundant assets - whoever owns them — and the operation will still have them (on lease) and be using them.
There are many advantages when opting for an operating lease, which enables organisations to continue benefiting from new IT systems, without having to use capital expenditure to fund this. This also ensures best practice budgeting and reduction of net debt. By liberating more cash into the operation, means that it can be properly managed - and deployed where it has best impact on core activities.
There is also a very important green benefit to this sales and lease back purchasing approach as organisations leave the disposal of their IT equipment to a leasing company. The equipment is then recycled and remarketed and where necessary, scrapped in accordance with WEEE directive. This also enables Public sector organisations to comply with restrictions laid down for acquisition of equipment in a Trust or Local Authority by statute or good practice.
In today’s economic climate and the requirements for belt tightening, green compliance, best value purchasing and cash management, it is an imperative that sale and lease back be considered as a practical and available IT procurement solution.