Wednesday, May 8, 2019

Buying a new fire truck: Repair or replace

Every week, I hear from a fire chief who needs a new apparatus and is told that repairing or refurbishing the old truck is the better deal.

That seems like sound financial planning.  But what are the financial implications of this decision?

What this decision really means

When a fire department is told to spend money on repairing or replacing a fire truck rather than buying a new one, there is an implied economic decision.

And, in economic terms, the decision is:

Should we spend less money for a shorter life span or spend more for a longer life span?

What is the best deal in the long run?


The savvy fire chief knows to measure the annual cost of repair or refurbishment versus buying new.  What this looks like is that repair will cost $150,000 and will "buy" 5 more years of life so the cost is $30,000 per year.  A new truck will cost $300,000 and "buy" 20 years of life so the cost is $15,000 per year.

Now, the proper calculation involves more than this simple example.  And, if you'd like a tool to help with the math, you can download a free tool at FirstBankers.net/Justify.

Summary

It will almost always seem that repairing "costs" less than buying new.  It's important to set up a true apples to apples comparison to know the best decision for your deparment.



Stay safe!
John R. Hill
President
First Bankers

Wednesday, May 1, 2019

Buying a new fire truck: Save up vs. Buy now

Every week, I hear from a fire chief who needs a new apparatus and is told they can't buy now but the council will save up for the purchase later.

That seems like sound financial planning.  And it is, but only if the truck is needed in the future.

But what if the truck is needed now?

The council is making the financial decision to delay the needed truck now and save up for a few years because they don't have to pay interest.  And I get it, no one likes to pay interest.

But what the council misses is that they lose buying power by waiting.  That means they will pay more money for the same truck when they actually do buy.

The savvy fire chief will guide his council to measure the cost of paying interest versus the cost of lost buying power.

What that looks like is this:


A $500,000 fire truck financed today at 3.5% will cost $53,703 in interest.  That same truck, assuming a truck inflation rate of 3.5%, will cost $593,843 in 5 years.

So, the cost of waiting and saving  is about $40,000.  The reason for this difference, even though both rates are the same, is that interest in calculated on a smaller balance each year while the inflation is being added to a higher truck price each year.

Summary

It's no fun to pay interest.  But it's more important to understand the costs of your plan and compare your choices for the right decision.



Stay safe! 
John R. Hill
President
First Bankers

Wednesday, April 24, 2019

Buying a new fire truck: How much does waiting cost?

Every week, I hear from a fire chief who needs a new apparatus and is told to just wait.

That's understandable.  Fire trucks are very expensive, maybe the most expensive item most small communities buy.  And it is daunting to see the $500,000 proposal when the community has so many other needs.

So, how can a chief respond to this objection?

The first thing is to recognize that the council is making a decision about "Should we buy now?".  It's not "How much can we afford?" or "How do we pay for it?".  Click here for more information on the 3 questions every chief must answer is here.

The second thing to is present information about the cost of their no-buy decision and compare it to the cost of buying.

It looks something like this:


Truck prices are increasing about 5% per year.  That means a $500,000 truck today will cost $578,812 in 3 years and $638,140 in 5 years.  So, the seemingly free decision to wait actually costs tens of thousands of dollars.

The goal is to get agreement that not buying is expensive and that buying makes financial sense.  Then, you can move along to the budget question ("How much can we afford?") and finance question ("How do we pay for it?").

Summary

Delaying and waiting is not a free choice.  Savvy fire chiefs know this and present information to get agreement on buying before addressing the next money questions.

If you'd like a free tool to help with this problem, send me an email by clicking here.

Stay safe!
John R. Hill
President
First Bankers

Wednesday, April 17, 2019

Buying a new fire truck: Are you answering the right money question?

Why do almost all fire departments need a new fire truck but can't get one?

I hear everyday from a fire chief who needs a new truck but can't get the approval to buy.

Most of the time, it's because the chief is answering the wrong money question

Each fire truck purchase has 3 money questions that the people who control the budget need to have answered successfully before they will commit.

The problem is that most chiefs don't realize the different questions and aren't focused on answering them. The 3 money questions are:
  1. Should we buy?  This question is the justification question and involves answering the question:  Is it cheaper to buy a new truck or keep the one we have?  Get a free tool to help with this question.
  2. How much can we afford?  This question is the budgeting question and helps you calculate how much you can buy with how much you have.  Get a free tool to help with this question.
  3. How should we pay for the truck?  This question is the financing question and most chiefs jump to this question without answering the other questions.  That is why they fail to convince their council to buy.  Get a free tool to help with this question.

Summary

If you are not answering the right question, you will most likely fail to get the truck you need.  Savvy chiefs know that all 3 questions must be answered before they buy.

Stay safe!
John R. Hill
President
First Bankers