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Capital equipment: how to get it and manage it.

SUMMARY

A survey of STC members showed that they generally lack the skills required to identify, select, justify, and manage the capital equipment they need. Technical communicators must learn to write capital equipment requests that specify the needed new equipment, show the benefits to the company from buying it, and recommend the way to account for it. To do so, they must learn some business basics and make friends outside their own departments.

Capital equipment is the large, expensive equipment you use to do your job. If my research is accurate, most STC members care deeply about keeping up with technology--to create new communication products, to improve the appearance of their work, and to improve their productivity. Yet the formal survey I conducted in 1991, and the informal follow-up I have done since, show that STC members generally lack the required skills to identify, select, justify, and manage the capital equipment and software that can keep them on the forefront of technology.

THE SURVEY

In my 1991 survey, I mailed 967 questionnaires to STC members in the United States who were fully employed by manufacturing, software, and service companies. The sample excluded retirees, students, and independents. The purpose of this survey was to discover how much knowledge STC members have regarding the economic forces that control their departments. The questionnaire had 12 parts. Part 5 dealt with capital equipment requests. Part 6 dealt with capital equipment budgets. In all, 101 responses came back, 40 from managers and 61 from nonmanagers.

The responses to the capital equipment request portion of the questionnaire totaled 55% of the managers and 28% of the nonmanagers. The responses for the capital equipment budget portion totaled 55% of the managers and 10% of the nonmanagers. Managers ranked management of capital equipment requests and capital equipment budgets second and third as their most important tasks (after the operating budget). Cost analysis ranked fourth.

In other words, the forefront of technology and capital equipment management are important issues that should be understood better.

WHY CAPITAL EQUIPMENT IS IMPORTANT

Nearly all members of the Society for Technical Communication use computers in their jobs. Computers support writing, word processing, editing, printing, page and book makeup, illustration, configuration control, cost analysis, estimating, and distribution. Computers and other technical publication equipment are capital equipment. Capital equipment has lasting value. When a technical publication department purchases a computer, other equipment (such as a copier), or expensive software, this capital equipment supports its efforts to perform its job. These purchases also add to the company's value by adding to the assets on the company's balance sheet.

The large initial costs and the subsequent value added to the company's balance sheet explain why senior management of the company must approve the purchase and use of capital equipment. Savvy managers know this. Management programs at the university graduate level show managers how to calculate the initial cost, life-cycle costs, and the pay-back of capital equipment. These same courses often demonstrate several different ways of justifying capital equipment expenditures so that management will say yes to a request.

WHY CAPITAL EQUIPMENT SCARES PEOPLE

In recent years, a great deal of financial interest has centered around a company's "real worth." We have all heard of, or held, stocks that were overvalued. We have heard of companies taking a "one-time write-off" to adjust the values on their balance sheets. The inevitable result of a write-off is that the company loses money, and may be worth less after the accounting adjustment.

When a company loses money in any way, a lot of people lose as well. Stockholders lose because the value of their stock goes down. Employees lose because the company cannot be as generous when its financial reports show its weaknesses. Employees fail to get pay raises. Employees also find that they are doing the work of two employees, and doing it on equipment that barely supports one.

Figure 1 shows a corporate balance sheet. The balance sheet is one of the financial reports that show a company's performance. The value of the company is listed on the left, under "Assets." This column shows all the items held by the company that have value. Assets are always listed in order of liquidity. Cash is very liquid--you take it out of the bank or your pocket and spend it. You will notice that accounts receivable have value, but are less liquid (we have to wait until our customers pay their bills). Capital equipment is somewhat liquid; you could sell the equipment for its current value and get the money. Depreciation is not liquid.
Figure 1. Items appearing in a balance sheet

      Assets                      Liabilities

Cash                            Accounts Payable
Trade Receivables               Taxes Due
Accounts Receivable             Dividends Payable
Prepaid Interest and Taxes      Notes Payable
Long-term investment            Loans Payable
Building                        Unpaid Salaries and Wages
Accumulated Depreciation
Capital Equipment               Stockholders' Equity
Realty (Current Value)


Depreciation is defined as the decrease in usefulness of all assets except land. Depreciation is shown as a negative value on the asset side of the line. This means you can list the full value of your new Bloggs network throughout its useful life. However, each month, you must also show the amount of depreciation on this network as a negative number, and each month this value increases. Accounting, like engineering, has rules, even if they appear to be weird.

While we're looking at the balance sheet, the bad news is in the right-hand column at the top. These are the liabilities. These figures show what the company must pay to vendors, the government, investors (current dividends and bond payments), and employees. What's left belongs to the investors.

From an investor's point of view, the only number worth noticing is the one on the bottom right-hand side. That number represents the stockholders' shares in the company. If the company stopped work tomorrow, sold off all its assets, paid all its bills, and split the remainder among the stockholders, how much would the stockholders get? The stockholders get interested in the other numbers if that single number in the bottom right-hand corner gets smaller.

From a manager's point of view, all the other numbers are just as important. Should we keep lots of cash on hand? Should we let our payables pile up? Can we really collect all our receivables, and if not, what percentage can we collect? Should we pay our bills ahead of the due date (reducing our payables) and take the discount, or should we let them age (increasing our liabilities)? If we must pay our bills, do we have the cash to do so? How much of our cash should we spend on capital equipment? How can depreciation help or hurt our chance of survival?

These questions, and a host of others, show why it sometimes takes so long to get a capital equipment request approved, and why management seems to show an inordinate interest in whether your new Bloggs 7000 is doing what you promised it would. The balance sheet summarizes all the worries in the company!

Thus, the remainder of this article looks at the capital equipment request and the capital equipment budget to show you how to make capital equipment work for you.

CAPITAL EQUIPMENT REQUESTS

A capital equipment request is a formal method of presenting the need for equipment, the benefit to the company of purchasing and using the equipment, the ways in which company life will alter because of the equipment, and a recommended way of accounting for the equipment. Capital equipment requests are important for at least three reasons:

* When a technical publication department makes a capital equipment request, it is asking the company to spend a large amount of money on the department. The money spent on one department is money no longer available for the next department that requires a large outlay. That is a basic law of economics. Thus, capital equipment requests can cause competition between departments for capital equipment funds.

* When the company approves a capital equipment request, the successful department involves itself in the capital equipment budget of the company. Capital equipment and depreciation appear on a company's balance sheet. Some banks and stockholders may look with more approval on expenditures made for laboratories and manufacturing than on expenditures made for technical publishing. Thus, the technical publication department may have to work very hard to get some requests approved.

* When a department successfully purchases a large piece of capital equipment, it accepts a contract with the company to manage this asset wisely. If a technical publication department fails to realize expected gains from using the equipment, the department may suffer in four ways:

1. Management may refuse to approve additional headcount for projects (arguing that the new equipment should compensate for additional people).

2. Management may require the technical publishing department to use the equipment even when it is not appropriate (arguing that big machines must do as much work as possible).

3. Management may resist paying for training, maintenance, and supplies (arguing that the equipment was approved and that should have been enough).

4. Most devastating, management may penalize the department for purchasing a "white elephant."

Thus, a capital equipment request must work very hard for the technical publication department. A request must represent the department's methodologies; its work load; its anticipated results; its understanding of company interests; and its ability to communicate. A first-rate capital equipment request contains several ingredients:

* A statement of the problem to be solved. "We spend more than $300,000 per year having manuals printed by an outside vendor. Our records show that in many cases we sell fewer than 50 copies of a manual; however, Purchasing requires that we print 500 copies of each in order to get the best price from our vendor. With a two-sided printer, we could print copies of each manual on demand, saving printing, warehousing, and scrap costs."

* A careful description of the jobs that can be performed by the new equipment and the jobs that cannot be performed. "The new printer will be used in two ways: to save paper for draft printouts, and to print small numbers of manuals with low volume distribution."

* Benefits to the company from new technology. In a workshop two years ago, a technical writer told me her company had cut her group from 6 to 3, and had installed new, high-powered workstations and advanced software. The company expected a benefit from introducing new technology. Advantages of new technology represent a solid reason why a company may invest in capital equipment. Even if you wish to keep all of your current staff, you should include a statement of the advantages to be gained from the new technology. In fact, you may need this statement as a defensive measure: "The new system will help us clean up the two-year backlog without adding workers."

* A survey of the possible vendors and products, listing the strengths and weaknesses of each. This survey should conclude with a list of three alternatives (management may be biased in ways you don't know about):

1. A description of lease and purchase options for the three top candidates

2. A list of training, installation, and supply factors and costs for each

3. A recommended depreciation schedule if you recommend purchase. This schedule is required to keep management from choosing a schedule that does not match the life cycle of the recommended product. Include the reasons why you are recommending the depreciation schedule (Gillette 1988).

In 1991, 40% of the survey respondents reported that their departments had written capital equipment requests for computer equipment (63% of the managers and 25% of the nonmanagers). Of the managers, 50% said they had examined the offerings for at least 2 or 3 vendors, and 25% said they had compared leasing with purchasing. One new manager turned the vendor-selection problem over to the company's management information system (MIS) department; two new managers turned the lease/purchase decision over to MIS.

RESOURCE MANAGEMENT

In managerial cost analysis, the relationship between depreciation and obsolescence is clear. Managers would like the capital object to finish depreciating on the same date that it becomes technically obsolete. When these dates coincide, the company obtains maximum use from the capital object just in time to purchase a replacement. In practice, this goal is difficult to achieve for several reasons:

* Managers resist paying depreciation from their operating budget funds. This means that managers typically wish to depreciate a capital object over the longest possible period to reduce the monthly deprecation.

* Some products become obsolete almost as quickly as they reach the market. In computer technology, this is especially true because technical innovations tend to leapfrog each other. During an interview, one manager said, "I expect it to be obsolete the moment I sign the purchase order."

* Companies typically use the traditional fixed-time method of depreciation, setting depreciation schedules based on multiples of 12 months. Obsolescence is not so neat. Products typically become obsolete during the first, eighth, thirteenth, or twenty-seventh month. This means that 1-year, 3-year, 5-year, and 10-year depreciation schedules rarely match the performance of the products they represent.

The sample shows that technical communicators do not generally deal well with this problem. The questionnaire asked two related questions:

* Did you recommend a depreciation schedule for the capital object?

* Did you predict when the capital object would become obsolete?

The answer to both these questions was overwhelmingly NO, and the results are dangerous.

Several years ago, for example, several writers from Bellcore looked at the technology revolution and recommended the shortest possible depreciation schedules for capital equipment so that a technical communication department could keep up with technology (Berliner and Brimson 1988). This advice has largely been unheeded in the technical publication community at large.

Yet all but the most experienced managers told me that they left depreciation to the control of the accounting department. Failing to recommend a depreciation schedule, and failure to understand that the equipment they are using is steadily becoming obsolete, can leave a technical publication department in an untenable position: unable to keep up with the workload or with management's expectations for performance and features in their technical publications.

Furthermore, MIS departments and accounting departments are notorious for their failure to understand the work of a technical publication department. The most savvy of the managers I interviewed understand this problem, and have worked hard to ensure that these outside departments know when to say yes. One manager said that she never asks for anything until she knows she can get it approved. Another said that she reports directly to the VP for finance, and that she has a good working relationship with this executive. The atmosphere of mutual trust helps her identify and justify her department's needs in a way the VP understands.

Other managers have not yet grasped this methodology. Anecdotal information about failures to get capital equipment requests approved is one of the reasons I performed this research in the first place. Over the years leading to the survey, I had heard a number of managers say that they rushed to prepare a capital equipment request, but never heard from the request again. Judging by the results of the survey, the reasons are not hard to find:

* Lease versus purchase: Accounting and finance people handle leases and purchases differently. Leasing costs come directly out of a department's operating costs, and do not represent capital assets. However, some companies adopt leasing as a way of ensuring that they can always have the latest technology. If your company prefers to lease, you should show how this preference will continue to help your department succeed, or make an awfully good case for purchase.

* Vendor selection: In some cases, only one vendor makes the product you want. In most cases, at least two vendors make similar products, and some vendors are so anxious for your business that they will make very good deals. Failure to identify and review alternative vendors and offerings may look to management like a failure to spend company money wisely.

* Life-cycle costs: It is naive to believe that you will spend all the money on a product when your finance VP cuts the purchase order. You must investigate and report the costs of supplies, training, support contracts, shipping, and installation. If you do not, management cannot predict how the new product will affect your operating costs for the life of the product. Management prefers to operate in a no-surprises environment. Therefore, management may feel that the best management method is to say no to anything they do not fully understand and cannot evaluate.

* Real productivity gains: Every time I teach a day-long workshop on publication costs, I am surprised at the number of departments that do not yet have real cost figures for past projects. These departments are literally running out of control, and their senior managers know it. By contrast, the best managers represent departments where cost and productivity studies are on-going. They know their costs, and they can predict the ways in which new equipment or software will improve these numbers. Management tends to say yes more easily to a manager who knows and uses the department's numbers.

WRITING THE REQUEST

If you have followed this presentation this far, you know that you cannot write a request until you have performed a lot of research. That research consists of three key items.

What Do We Need?

The simplest answer to this question is usually "more." More writers, more capacity, more printers, more processing power, and more time. However, managers who analyze their operations know their departments' weaknesses and can be more precise:

We printed more than 75,000 pages of drafts for engineering review last year. In some cases, these printouts represented third, fourth, or tenth drafts for review. We need more and faster printers. We also need a process that requires engineers to get all their review comments into the second draft so we can stop running the printers to capacity and using valuable engineering resources.

In addition, if we get faster printers, we need a better network software package to keep up with the new printers. Our request is based on a printing reduction (in draft form) to 45,000 pages this year. We are seeking two high-speed, two-sided printers and a new Neithernet software package that will run them. The total cost is $xx, xxx. We should depreciate the printers over 24 months and lease the software to ensure upgrades as they become available.

What Vendors Supply What We Need?

Few of us are rich enough to walk into the nearest Megabus dealership and purchase the biggest thing on the lot for the price scrawled on the windshield. But my research shows that technical communicators tend to accept without a fight the price quoted by the nearest vendor. Management wants us to make a deal. Can you buy the software from a discount house instead of the factory-authorized dealer? Can you find a vendor making clones of the workstations you want? Can you buy last year's model? Can you read the manuals so easily that you can dispense with thousands of dollars worth of training? Can you get an upgrade on the warranty at no extra cost? Will the new system save tons of paper? Do the new printers use recyclable toner cartridges, and will the vendor guarantee to buy them back?

Enquiring managers want to know.

You won't get the deals your management wants unless you ask, and demand, and hint that you've found a better deal down the street.

Your own management's policies may also get in your way. You might get a better deal, for example, if you can convince your VP of finance to pay the bill in 10 days instead of going to 60. Why? Because the vendor may give a 2% discount for cash in 10 days. Will the vendor buy back the equipment if you want to upgrade? Does your company have problems with shipping capital equipment out of the building even for an upgrade? Does the equipment have scrap value, and will the vendor introduce you to a third-party that will handle the resale for you? Will the company let you scrap old equipment?

Enquiring managers want to know, even if they resist, when you have a plan for doing better and cheaper business.

What Will Senior Management Approve?

You will never know what senior management wants unless you get to know senior management. Some of my best friends are controllers, accountants, bookkeepers, and finance VPs. Obviously, the same holds true for some of the savviest managers in this business. Listen to some of the interviews and anecdotal comments:

You ought to talk to Mary. Two years ago, her department couldn't get anything out of management. Now that she manages the group, she not only gets her requests, but senior management says that hers is one department they don't have to worry about.

I made friends with my management. I got my department transferred so that I report to the VP Finance. I have spent a lot of time educating him so that he knows what my department needs.

I only ask for what I know will be approved.

And what does senior management approve? New technology, because it contains a buzzword they have heard of. Low-cost solutions that have big paybacks. Solutions to problems that touch them personally. For example, if you want better response from the finance department, do something for them. Help them format and print new procedures. Show them how to make prettier spreadsheets. Talk about how to save money in your department while you are hanging around being helpful.

MANAGING THE CAPITAL EQUIPMENT BUDGET

Large and lucky departments have or have access to a capital equipment budget. This budget summarizes future plans for acquisition of plant and equipment. Typically, this budget is a fund of money with allocations or trial allocations of money to different departments, and/or to accomplish various company goals.

A capital equipment budget has two drivers--the company's need for improved performance, and the depreciation rate of the company's current capital equipment. If a company's capital equipment ever became completely depreciated, without replacement, the company would be in a poor position to make goods.

We need only look at the rusted factories of an area which once had high employment and heavy industrial output to show what happens when a company fails to replace equipment as it depreciates. If you wonder why some industries have gone overseas, look at these rusted, worn-out buildings. The popular argument is that wages are lower in third-world countries. However, in most industries, wages constitute less than 10% of the cost of producing goods. The biggest real cost is capital equipment. If a company runs for several years without replacing fully depreciated capital equipment, it reaches a point where the cost of replacing the equipment is astronomical. Then the company ceases to function.

To avoid such disasters, companies set goals for themselves to improve operations and become more competitive. The capital equipment budget helps a company achieve these goals.

For example, factory automation is a company-style goal, which involves several departments, and may require several years to complete. A company prepares a capital equipment budget to automate the site, and includes allocations for factory lines, various engineering groups, various accounting functions, purchasing, and the president's office.

If your company has a capital equipment budget, your department may have allocations that you don't even know about. Has this ever happened to you? Someone from upper management or the company computer group walks into your department and announces that your group will be getting new workstations and access to a new network? If so, a capital equipment budget has been created that includes you.

Next time, make sure you have input to the budget before it happens, not after. How? As communicators, we should be vitally aware that we can't use information if we do not know it exists. Knowledge is power.

So after you have made friends with the finance group, talk to them about the company's current capital equipment budget and your place in it. If you don't have a place in the capital equipment budget, you need to work harder.

MANAGING THE OPERATING BUDGET WITH CAPITAL EQUIPMENT

Depreciation "comes out of" the operating budget. This means that every month, a line item in your operating budget "pays" your depreciation. Technical publication managers react to this line item in one of several ways depending on their level of sophistication:

* They try to ignore it. They treat it like a tax ("better if you don't look--it won't hurt so much").

* They treat it like a penance the company has imposed on them.

* They look forward to the time when the amount decreases, because they will be less over budget.

* They use it as a planning tool.

If you would like to use the depreciation line item as a planning tool, you have to understand it. Unlike other line items in the operating budget, the depreciation line item has several dimensions: numbers of individual pieces of equipment, time, and depreciation rates.

Here is an example: A technical publication department has six workstations, two printers, a scanner, and a copier. Table 1 shows these items.

Looking at this breakdown, a savvy manager or communicator can make some very good planning decisions:

* We know that the printers will cost less to replace than they cost just four months ago. A savvy manager might plan to replace them before they complete depreciation to improve productivity and cut depreciation costs. A savvy manager might look for a deal on a trade-in, or find a department that needs better printers, but does not need the same level of productivity as the technical publication department.

* The workstations have only 4 months remaining in a 36-month life. They are already obsolete. As soon as they complete depreciation, the department should replace them. At the very least, the department should anticipate major maintenance within the next 6 months (power supplies and disk drives, for starters).

* A savvy manager or cost analyst will not look for a break in the budget when the workstations "fall off" the depreciation schedule. He or she will know that they cannot spend money budgeted for depreciation on something else. That's not how operating budgets are written. Instead, the savvy manager has already convened a committee to start looking for replacement workstations, and will have the replacements delivered on the day after the old workstations finish depreciation.

TABULAR DATA OMITTED

HOW TO GET SAVVY IN CAPITAL EQUIPMENT

You can have the same savvy as the best technical publication managers and get the best technical equipment at the same time. Here's how:

* Walk around the department and identify all the capital equipment there. Look for the invisibles as well as the visibles, such as networking equipment or a server that is upstairs. If you share equipment with another department, make a reasonable estimate about how much of the operation belongs to your department. Jot down serial numbers and property numbers so you can identify your equipment completely.

* Dig into your department's operating budget and locate the depreciation line item. Jot down the number for one month's depreciation, but do not pass judgment on this number. If your group is part of a larger department, try to find out how the budget for the larger department handles depreciation, and try to assess your share of it.

* Talk to your accounting or finance department. Someone in accounting or finance has responsibility for capital equipment. If you present a list of equipment numbers, this person can tell you how old the equipment is, how much the company paid for the equipment, and how much longer the equipment has to depreciate. Don't be surprised if some of your equipment is on a five-year depreciation cycle, and still has a long way to go.

* While you're there, find out if the company is depreciating anything weird, such as shipping charges or training. Ask politely but firmly to have these charges taken out of the depreciation schedule and written off in the current month. It hurts when it happens, but your department will run more smoothly because you will understand your costs more completely after the write-off.

* Track your costs month to month. If the old printer still has six months to run, but service costs at least $1,000 per year and supplies cost $900 every six months, you'd do better to get rid of the thing now and get a new one. Someone in accounting can help you put the numbers together, and will do so for the good of the company.

* Start laying the groundwork for an entire new system that is based on the latest technology. If you say you are vitally interested in new technology, you have to put someone's money where your mouth is. You have seen what you need--friends in accounting and finance, a good dollars and sense knowledge of your own operation, critical skills in negotiating, and patience. If you begin now, you can build your own capital equipment environment instead of having one thrust upon you.

CONCLUSION

After I finished the numbers coming out of my survey, I was very concerned about the future of the profession. Some companies and some managers are very smart about the value of technical publications and the financial methods of ensuring good pubs. As a group, however, we all have to get better. Capital equipment is so fundamental to the way we all work that I believe it should be one of our most important priorities.

Like anything else, getting your capital equipment house in order takes hard work. But the superstar managers in our profession know how to manage capital equipment. We all can do the same.

Good luck!

REFERENCES

Berliner, Callie, and James A. Brimson, eds. 1988. Cost management for today's advanced manufacturing: The CAM-I conceptual design. Boston, MA: Harvard Business School Press. The editors have identified two classes and several types of depreciation:

* Fixed time - Sum of years (traditional)

- Declining balance (rapid decline in value during the early life of the product)

* Value added - Machine hours - Surrogate machine hours - Apportionment - Inventory velocity

These methods are all legal in the United States and can be justified on production equipment, including computers used in technical publishing.

Gillette, Jay. 1988. "EPS deployment: Does the technological revolution mean organizational upheaval?" Proceedings, 35th International Technical Communication Conference. Washington, DC: Society for Technical Communication, pp. ATA140-142.

ADDITIONAL READING

Horngren, Charles T., and George Foster. 1987. Cost accounting: A managerial emphasis, 6th ed. Englewood Cliffs, NJ: Prentice Hall, Inc.

GLOSSARY

Accelerated depreciation - any pattern of depreciation that writes off depreciable assets more quickly than straight-line depreciation

Accounts receivable - money owed to the company for goods and services it has sold

Balance sheet - a statement that shows the worth of a company in terms of assets, liabilities, and shareholders' equity

Capital equipment budget - a company-wide, division-wide, or departmental budget dedicated to the purchase of capital equipment over a one-year period, or a multi-year period; typically based on the company's strategic plan for improving technology or meeting competition

Depreciation - a method of expressing the loss of value of an item over a period of time, typically beginning with its purchase price and ending at $0 at the end of the period

Depreciation line item - the item in the operating budget that shows the monthly depreciation for all capital equipment held by the department

Depreciation schedule - the number of months over which the initial cost of a capital equipment item will be reduced to $0

Discount - a reduction in the price of a product or service granted to the purchaser for paying the bill within a short period of time

Double-declining balance depreciation - a method of depreciation in which the first-year depreciation is twice the amount of the straight-line depreciation for the same year

Fixed-time method of depreciation - a method of calculating monthly depreciation in which the initial cost is divided by the number of months in the depreciation schedule

Initial cost - the money you pay to get the capital equipment item into your company, which may include shipping, installation, training, and initial supplies

Liabilities - the debts owed by the company to third parties, such as vendors and various government agencies, and wages to employees

Life-cycle costs - the total costs of buying, staffing, and supporting a piece of capital equipment over its useful life

Liquidity - the ability to convert assets to cash

Pay-back - the ability of a piece of capital equipment to provide value to the company by increasing saleable products, reducing costs, or improving competitiveness

Payables - see liabilities @ @
COPYRIGHT 1994 Society for Technical Communication
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Author:Caernarven-Smith, Patricia
Publication:Technical Communication
Date:May 1, 1994
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