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Oily Rag column: Frugal business

Frugal business

By Frank and Muriel Newman
Week of 25 March 2013

We know a lot of oily raggers not only live off the smell of an oily rag, but they run their business off the smell of an oily rag also. Be it business or pleasure, the net effect is the same - more of your dollars in your pocket instead of someone else’s.

A reader asked us about the pros and cons of leasing versus buying an office photocopier, so, we have crunched the numbers. We asked one of the well know office equipment suppliers to give us a couple of options. In the first option, we could buy a new machine for $5,995 (a pretty fancy one admittedly). The second option was to lease the machine on a 48 month term at $177.56 a month.

The ownership deal is pretty straight forward. You pay for it, you own it, you claim depreciation for tax purposes at 40% a year on the diminishing value, and you can sell it anytime you like.

The leasing deal is more involved. You don’t own the machine, so it’s not yours to sell at the end of the 48 months. If you want to opt out of the lease agreement before the 48 months you will be liable for the remainder of the 48 payments (!) – even though, having returned the machine, they may have leased it to someone else or sold it on the second hand market.

In this example, the total lease payments over the 48 months are $8,523. In other words, there is $2,528 worth of interest in the repayments. Assuming the machine is leased for the full 48 month term and has a resale value equal to its book value at that time, the effective interest cost on the money is 24% (higher than credit card interest rates!). And that’s the best case scenario - it would be a heck of a lot worse if the contract were terminated early.

A third and better option would be to buy a second hand machine. In this example a good used machine that does pretty much the same thing as the $5,995 new one could be bought for about $3,000.

Now to accommodation matters. When making motel reservations always ask for a “corporate rate”. Sometimes they will fob you off but often they are only too happy to sharpen their pencil and give you a deal. If you are a regular customer then you certainly should receive a discount. If they don’t offer a corporate rate, ask if they are running any “promotions or packages”. Alternatively, shop around online. Check the web sites of your favourite hotel chains. They may have some online promotions.

Have a look at www.lastminute.co.nz - it does not even need to be a last minute booking to get a deal; you can book weeks in advance. One oily ragger recently booked a hotel in Tauranga at $89 instead of the normal room rate of $120. That’s $31 they saved - a 25% discount!

Big Fat Lazy Costs. These are costs that contribute nothing to the success of the business but sit around because no-one has taken the time to review them. In one case a business was able to save $3,000 a year by putting its cleaning contract out to tender.

That Big Fat Lazy $3,000 saving went straight through to the bottom line where it should be.

Let’s not forget that cutting costs produces an instant increase in profit and is a lot easier than trying to win new business. For example a business that adds a 25% margin to the cost of goods needs to increase sales by $15,000 to add $3,000 to the bottom line.

If you have a favourite money-saving tip, please share it with us so we can share it with the oily rag community – send your ideas to us at www.oilyrag.co.nz or write to Living off the Smell of an Oily Rag, PO Box 984, Whangarei.

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Frank and Muriel Newman are the authors of Living Off the Smell of an Oily Rag in NZ. Readers can submit their oily rag tips on-line at www.oilyrag.co.nz. The book is available from bookstores and online at www.oilyrag.co.nz.

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