How to Weigh Buying Decisions

By Jim Wilmarth 

Commercial Loan Officer at Bank of Amador

With money tight, businesses find there are more potential uses competing for available funds. So, how do you weigh your buying decisions and choose a project or purchase that will help your business the most? 

Analyzing the expected increase in revenue or reduction in costs that will result from your investment is a good place to start. Acknowledge that these are going to be estimates because they lie in the future, but use your knowledge and experience to make an effort at reasonable estimates. 

From there, calculate how long the expenditure will take to pay for itself. Just divide the cost by the average annual expected improvement in cash flow. For example, if the purchase costs $8,000 and generates $2,000 a year in additional income – or saves $2,000 in expenses – it would take four years to pay for itself. 

The payback period is one measure of whether the purchase you’re considering is a good buy. It should be longer than the expected life of what you purchase so you not only recover the investment, but generate additional income or savings. You may want to compare the payback periods for each possible use you’re considering for the money. A quicker improvement in your bottom line is better.  

 Jim Wilmarth is a Commercial Loan Officer at Bank of Amador with over 21 years of banking experience.   For more information, contact Jim at (209) 223-7237 or jwilmarth@bankofamador.com.

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