Unexpected Costs Can Ruin Vacations… and Affect Net Income
Paying as You Go vs. a Home Warranty
Imagine buying that beautiful dream house you have always wanted. Now imagine all the unexpected costs that await you for the next 10 years. Many homeowners don’t have a budget in place for major repairs or emergency replacements. If you analyzed and planned for these ownership costs at the very beginning, you would probably be able to maximize your investment over the next 10 years. But, if you are like many homeowners, you might ignore the inevitable expense of a repair or replacement. There’s a viable alternative. Many homeowners are opting to invest in a home warranty to offset the costs of these inevitable expenses instead of paying as you go. If you choose to pay as you go and get caught unprepared, the money that you have saved toward your dream vacation to the Greek Isles or a fishing trip to Alaska is now purchasing a new heat pump – not nearly as much fun!
Nice Story, So What? I’m Running a Business Here!
Businesses, organizations and government agencies are responsible for infrastructure that needs to be repaired or replaced. Have you budgeted for repairs or replacements of critical infrastructure like the below?
- Chiller plants
- On-site generators
- HVAC systems
- UPS systems
- EE efforts
- Compressors and a host of other capital-intensive systems
You might not miss a vacation, but having multimillion-dollar unplanned events hit your books certainly can affect your net income projections. How frustrating is it to have a good year only to have to dilute net income for huge repairs?
Don’t Let Unplanned Events Negatively Affect Your Net Income Projections
Businesses are considering ways to restructure large infrastructure systems via outsourcing. This is when a provider owns, operates and maintains the equipment while the business pays a monthly fee, exclusive of utility provided energy. By providing the upfront capital and leveling anticipated operational costs for multiple years, the managed services benefit businesses that recognize the value of protecting net income. Should equipment included in the outsource agreement incur a major repair, the monthly fee, in most cases, may not need to change. Assumed operational risks reside with the provider.
Regardless of the name – Total Predictive Maintenance (TPM), Levelized Cost Integration, Cost Predictability, or other self-titled programs – businesses can restructure the large capital outlay and know their expected Total Cost of Ownership (TCO) for the life of the agreement. This is powerful knowledge. Infrastructure is typically not a high-yielding investment. Your core revenue-producing operations are where your focus and investment may reside. By reallocating capital, you can invest in core, high-yield areas such as making more or better widgets, increasing speed of throughput, attracting more customers and, most importantly, protecting net income.
OK, Tell Me More
An outsourced service may include:
- Transfer from CapEx to OpEx
- Design, engineering, permitting, construction and commissioning
- Transfer of all risk to provider
- All maintenance and repairs, planned or otherwise
- Elimination of large capital outlay at front of project
- Routine testing, fueling, servicing and archiving
Depending on the accounting convention used, some services can also be “off-book” as the asset is owned by the provider. This can be another savings conduit for your organization. Many organizations are now realizing the value in working with outsourcing providers to restructure their infrastructure related expenses.