How much do you typically spend on equipment/improvements each year?

By that I mean is there an annual budget? We currently do not have a budget for these things. It's mostly always been, buy it when you need it. I'm proud to say we're pretty much out of the survival mode and I'm trying to establish a good number for equipment and improvements to our facility. My initial thoughts were to allocate 2%-5% of whatever we net for the year but wanted to see what you guys did.

it depends

If the light over my desk burns out, they buy a new bulb (after some time, heck they save electricity)

If the building is on fire, they do get around to putting out the blaze.

Used to be, I would see percentage based budgets for this very item (repairs, replacements, etc)

Now it seems "run it until we can make no more".

cranny said:

By that I mean is there an annual budget? We currently do not have a budget for these things. It's mostly always been, buy it when you need it. I'm proud to say we're pretty much out of the survival mode and I'm trying to establish a good number for equipment and improvements to our facility. My initial thoughts were to allocate 2%-5% of whatever we net for the year but wanted to see what you guys did.

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how old is life of machines before needing replacement ? 10, 20, 30 years ?
you factoring $1,000,000 installation cost on a $2,000,000 machine ?
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a company can spend $170,000. just to clean and paint the walls and ceiling where a new $3,000,000 cnc is going. part of the $3,000,000
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many companies wait too long and keep inefficient older machines around and find they cannot compete but complain at same time they cannot afford new machines.
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day one on machine install you should be saving money on that machines replacement. no different you buy a new car you start saving for replacement car in a expected 10 years (8-12 years)

OK - if you want an idea of what larger businesses do - check the last columns that refer to CAPX (capital expenditures). You will find that it is all over the map....

Capital Expenditures

IMHO its a must. Me i make a lot of my own tooling because im doing weird crap most the time that a off the shelf solution is either unaffordable expensive or too big to fit in my limited space. Maintenance gets done as and when needed, some times i will drag it out a little say whilst ordering parts, but generally if there a problem on any of the tools its priority number 1 to fix it, again what i do i very much need everything up and working.

Making my own tooling often burns time and materials, but i have very very rarely ever regretted making tools for specific jobs. One man band every efficiency you get helps you do more work for the same effort next month.

IME and its been a sad fact i have seen play out way too many times, small companies have a few slower but good years and invest in equipment to build work - build customer base, they then pick up more work than they can cope with and stop investing in kit, sell off some of the lesser used stuff and to be fair generally continue to make good money for the next 3 or so years. Then the gravy chain comes to a end, customers end up going else were, the competition catches up and its game over.

My case a big reason for new kit is tax brakes too. Saving 29-40% on tax still makes new equipment far from free yes. But 99 times out of 100 it sure makes it easier to earn the same or more next year. Oftern times its the simple things too, having the right size spanners to grab whilst at a machine, more tool holders for both the lathe and mill etc. Little things can really bump productivity and a lot of it will pay off for the long term. One of the best things i got last year was a matching pair of 3 jaw removable top jaw chucks for the lathe, one lives on the lathe, the other on the mill table, like this i can turn a job in soft jaws then bring thoes same jaws over to the mill and do the milling on the parts gripping em in exactly the same way!

I would suggest on average, 10%. But PLAN where it is going to go, whether that be machinery, facilities, infrastructure, IT or what not. You always want to reinvest in your business. It's best to have a 5 year plan, the first 2 years are fairly solid, the next 3 are kind of a "this is what we should do based on current conditions" guesstimate. This plan will ALWAYS be changing based on business needs, but you need to have a plan. If you set aside money for capex, then when a big job comes along out of the blue that requires $10k worth of tooling / fixturing, you can simply delay one of your planned projects and use the money for the new big job....... but you have BUDGETED that money and have it available for such an occurrence.

5% would barely cover equipment wear & tear over its life expectancy.
I prefer to look at it in terms of gross sales, and attempt to show as little net as possible.

cranny said:

By that I mean is there an annual budget?

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Borrow a page from accounting to understand this. Yeah, accounting is somewhat theoretical, but so are budgets....and there is a lot of collective wisdom in it as a way to have number represent the business

Separate maintenance and capex. Maintenance is what it is and will vary depending on equipment/breakdowns etc. On capex, buying new capital items, if your depreciation is set up to mimic reality (as it should be) - i.e. the time periods are in keeping with the real world using up of the equipment, your annual capex budget should be around the depreciation figure.

Of course life is lumpy and doesn't work off a spread sheet. Manage this by something like the idea of sinking fund. If you didn't have much capex in a specific year, you should still think of taking an amount around the depreciation level and put it in sinking fund.

Adjust to the real world as necessary

cranny said:

By that I mean is there an annual budget? We currently do not have a budget for these things. It's mostly always been, buy it when you need it. I'm proud to say we're pretty much out of the survival mode and I'm trying to establish a good number for equipment and improvements to our facility. My initial thoughts were to allocate 2%-5% of whatever we net for the year but wanted to see what you guys did.

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14-20% for a growing company. 7% or less for sustainability and just level.

Thank you all for the input' I really appreciate it. I'm currently struggling with a co-owner and that doesn't want to spend anything. And the kicker is, we have a very generous reserve in the bank where we can. As well, our net has been strong for the last couple decades. I'm of the opinion we should re-invest into the company while we have it. He usually takes it as I'm trying to outfit the entire shop with new equipment. By establishing some type of budget, we can earmark some funds for just that reason. If we don't make and money, then we will forgo any capex for that year. Seems simple enough but this guy is so myopic in his view.

The other way to do this is with an ROI payback target. That payback target could vary from year to year, depending upon cash flow. You ought to be buying anything with a real ROI of a year. Maybe ought to be buying it even seven or more years out; especially if its a durable and safe asset (like real estate used to be). Hardest part of ROI based targets is being honest with yourself about true return on investment.

Anyhow, that's a slightly more actionable way of saying "it depends." You might budget so you have 10% or so of revenue to invest -- and hold it over to the next year if there isn't a good enough opportunity then.

The issue with rapidly growing businesses is cash flow -- a whole 'nuther discussion. In that case you have more good investment opportunities than you can possibly take advantage of without some external source of capital. Given that we're talking machine shops here, you have cash in the bank, and your co-owner isn't much into investing that's probably not a concern.

The ROI argument could help you and your partner see eye-to-eye. He'll be leaving money on the table otherwise. You can have a stack of a dozen investment proposals - simple as possible to capture things. Get in the habit of noticing when you're losing time, money, bids, quality, customers. Then pick the top improvements you can afford in any given year. You won't and don't have to be perfect. And there's some sense in taking small risks on sensible experiments to improve productivity or keep and expand your customer base. It will be your "batting average" compared to the shops you compete with that counts.

Personally, I always spent a bit of not-fully-justified money just because it put a grin on my face. Kept me liking working long and hard. Not sure how many employees you have, but letting them in on the let's-improve-things ethic might have paybacks in attitude, work ethic, and retention. Even if it's your own.

it depends but a lot time

Know where your costs are

alexpik said:

it depends but a lot time

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I'm not a machinist. I'm a retired mechanical engineer who made a good career out of, among other things, working with shops like yours. I was always shocked at how poorly shop owners understood their own costs and their willingness to operate from gut feel and let the bookkeeper worry about the rest. You'll quote a job based on an overall hourly rate you think is competitive and multiply that by your best guess of the hours the job will take. Maybe you will get a quote on material to refine the quote. (Material cost is usually the first and sometimes the only one to get your attention)
You have to do better than that. And that includes the numbers you give to your tax accountant, which taken alone, are a lousy way to manage day to day operations and sales.
I know this means putting in place some new disciplines. And I know you have to make sure this doesn't go negative in the minds of your crew. But to survive you have to do it.
That done you will then be ready to plan and budget for your future investments and business strength.
Ed Weldon