Why wouldn't a company want to finance a new machine?

[rbmgf7]

I work for a large-ish American corporation but it's your cliche corporation: not willing to invest back into operations; profits go back to investors instead, yaddi-yadda...

My PM thinks he did an outstanding job getting 200k worth of funding to go back into the plant and part of which he thinks can buy a new/used machine (specifically a lathe). I can tell you right now, I'm about to burn through that 200k just to repair what we have and have it go towards other expenses not even related to machining.

I've asked and asked and asked why can we not just finance? The financials are there to do so but everything has to be approved by corporate and corporate won't allow for it for some reason. Is there any justifiable reason why a company won't finance a machine? They have purchased new machines in the past which they will pay cash for (and it was based on an emergency. The machines won't get the servicing they need so they just get driven into the ground).

This company will only purchase something that will replace the current machine with equal or even less capabilities. If I could finance something that can 1-OP our parts, we could save loads of time and money.

 

[jccaclimber]

I’m speaking only from limited past experience here, but it may have to do with how the corporate debt is controlled. Those in power on the finance side at past places I’ve worked had specific ways of getting loans, issuing bonds, using a credit line, etc. That gave them control on terms, a clear picture on the cost of that debt, etc. They would rather have all debt go through those channels and then pay for everything up front vs. dealing with the terms and monthly payments to each and every machine dealer they got something from.

The slightly smaller places I’ve been at, which also had worse credit, financed everything they could through the machine seller, but they probably didn’t have any good other options.

 

[Mcgyver]

imo 'financing' is a red herring. I think you are wanting an answer as to why they haven't answered "yes" to the question "should we invest". The question "should we finance it" is a about how to pay, after the decision to invest is made. Its a business decision whether to invest, a treasury decision on where the money comes from.

On why they are not investing, (imo) your real issue, who knows what the answer is. A bad manager, some planned different direction they haven't disclosed? could be a lot of things. You'll get the usual cries of bean counters and biz knobs ruining the world, but its somewhat BS. This idea leadership is only worried about the next quarter is a myth....a manager/business leader is worried about sustainable earnings/growth over time not just one quarter (else there would never be any capex). Of course that is the thoery, the real world is far from perfect and people and decisions are flawed.

If you're involved or have influence in the decision, I would express it something like I need a capital budge of A and with that I can improve returns from X to Y. If get nothing, because of lack of maintenance etc, the returns will shrink from X to Z. To maintain returns of X I need a budget of B. Doing so in writing puts you at some risk, but also makes the reality you describe harder to ignore (that memo can absolve you and cause someone else to act for fear of their asses being bitten by it)

That, and dust off your resume

 

[mhajicek]

In my experience, the answer was that the C suite wants to bleed the company dry, wind it down, sell off the remaining assets for a pittance, and bundle up and try to sell the IP. It was extremely wasteful for the company, hundreds of millions of dollars wasted and what could have been a functioning and profitable company destroyed, but the individuals in those C suite seats each got a nice golden parachute.

 

[Bill D]

By not maintaining the equipment and not getting in newer stuff they can justify shutting down, cashing in land and and giving bonuses to the head office big wigs. A golden parachute is a better deal for a 55 year old manager then a slight pay increase for a few years before retirement. Investing in the company no one gets a big fat bonus as the company chugs along and slowly increase profits year to year.
Bill D

 

[Kalispel]

Return on Invested Capital (or variants of this metric) is one of the primary metrics that corporate executives and shareholders use to measure the effectiveness of a company. Basically, optimizing the ratio of profit divided by the capital invested to earn it. They look at all the options for investment and theoretically invest where the company (and shareholder) will get the greatest returns.

It is very difficult to invest when profitable growth is limited. Executive management will spend money to fix or replace failing assets when profits are at risk but they will scrutinize these expenses. They know stuff breaks and wears out so they usually provide operations managers with a discretionary budget to maintain the status quo. This is likely the purpose for the $200k your boss has available.

Once upon a time, companies leased equipment because it was viewed as an expense. It went through the profit/loss statement but it did not directly hit the balance sheet. Those rules changed in response to some of the whopper-sized corporate failures like Enron. Clever executives invented ways to manipulate financial reporting through the use of off balance sheet arrangements that created debt obligations that were invisible to investors. Today, leases are reflected on the balance sheet as a debt obligation. This means the CFO and CEO will now watch leases where they were oftentimes more liberally managed in the past.

Just fixing old equipment will not win a new investment. The investment must generate a return greater than the company’s cost of capital. Cost reduction is the easiest justification. Expanded capacity only works if the new capacity can be immediately utilized to generate profitable sales.

Longer term capital investments are made to realize the company’s strategy. Things like R&D, new plants, new technologies, etc. are investments with longer time horizons and risks. These are always directed at the executive level and the board almost always has some oversight of progress.

The same principles apply in a smaller company. Maybe it is less formal or bureaucratic but there is always an owner who wants the best returns for their investments.

 

[gbent]

The invest in operations questions all boil down to one: Do the powers-that-be actually believe in the future of the business?

The purchase outright/finance question is just a smokescreen. When you aren't going to do something, one excuse is just as good as another. Many managers of all ranks consider a $10 profit today better than a $100 profit next year. There are a variety of reasons, but a big one is said manager's bonus is based on the $10 profit today, and someone else may reap the bonus of the $100 profit next year.

Always remember, you will get the behavior you incentivize. The behavior will most likely not manifest itself in the manner expected when the incentive was created, but it will occur. Untended consequences usually outnumber the intended ones.

 

[adammil1]

Here's a guess with interest rates at an all time low on corporate borrowing its probably best to go to wall st. sell some bonds and pay cash for your machines.

Look at it this way if you're a dealer proposing to the company that they make payments on a note at 10% on the machine when Wall St. will sell them the money at 5% where do you expect the company to go for financing? On the other hand just like any other sane organization than the federal government there's also probably a limit to how much debt your company wants to hold at any given time. Unfortunately your new machine with its monthly payments is just more debt added to the big pile.

Sent from my SM-J737V using Tapatalk

 

[NRDock]

Kalispel has it.
Management bonus depends on "Return on Assets".
Making money with depreciated assets maximizes their bouns.
For decision making purposes, any time beyond the end of this year is pretty much the same as infinity.
Bad KPI ===> Bad decisions

 

[Kalispel]

Kalispel has it.
Management bonus depends on "Return on Assets".
Making money with depreciated assets maximizes their bouns.
For decision making purposes, any time beyond the end of this year is pretty much the same as infinity.
Bad KPI ===> Bad decisions

Kalispel was that management guy for many years. My logic did not change when doing things on a much smaller scale for myself. The object is always to get the best bang for the buck you have available to invest. I just saw Garwood posted a similar concept on the Am I not smart thread.

The bonus follows the good results from investing in the right things.

 

[rbmgf7]

Ok, Kalispel's explanation makes sense. Thanks.

Yeah, year after year after year, we just keep paying to keep obsolete machines working. We have Hitachi Seikis, Fadals, 25 year old Robodrills, etc. that we pay thousands and tens-of thousands of dollars to keep running. Hell, the Robodrill runs for about 4 hours a month but had a drive and motor go out that cost $15k to fix. THE MACHINE ISN'T WORTH THAT MUCH. I was trying to move the work into a new cell but management (not having a clue about operations) just approved the PO to buy new equipment. We will NEVER get that return in this lifetime. We paid $12K to fix a spindle in a Fadal but it could never get fully functional (drive started acting up afterwards). My previous boss pulled the machine out of the plant and put it OUTSIDE IN THE ELEMENTS. It's now a hunk of rust. It's these financial decisions that's driving me crazy and it happens ALL THE TIME.

Resume is brushed up but I can't get into anything in my area so I have to relocate. I'm just riding it out until I'm fired or whenever they close the doors. I think it's ironic this large corporation thinks it's growing but everyone knows it's not (in three years, I've watched 5 domestic facilities close) meanwhile I watch the privately owned mom and pop shop across the street build their third facility.

The red flag when I started working here was management isn't interested in ideas unless it has a 1 year ROI. I broke out into laughter right in front of my bosses and said "if I could get you a 1 year ROI, I wouldn't be working here." They just sat there and let that phrase marinate and finally the light came on.

What pisses me off is the company has the audacity to post things on their intranet like "we just acquired another company for $300M..." but hand out peanuts of $200K to us. They continue to dump millions in their offshore facilities but they just continue to tank, hard. All the work that went there over the years is coming back to us.

I'm having to write my new goals for 2022. My boss handed me some topics and it's basically giving me no choice but to offshore our stuff again (they tried it in the past but I told them in the most professional manner to f*ck off). I don't know how much more costs can be cut. They buy the cheapest of the cheap for EVERYTHING yet expect me to make them money with nothing.

I need to get my MBA apparently.

 

[kenton]

Is the mom and pop shop across the street hiring?

 

[Kalispel]

My guess is senior management has your facility on their list to be downsized or closed. They are probably watching the cost to keep it running vs the cost to consolidate it with another operation or outsource the work. This sort of decision is made based on high-level costs and competitiveness, not just the maintenance costs for individual assets. It takes a skilled Site Leader to make the case to reinvest.

 

[rbmgf7]

Your guess is likely 100% right.

The question was likely self explanatory but I just want to know from their perspective besides throwing the plain 'ol fashion "greed" around.

Two years ago it was 100% evident this place was going to shut down. Our former PM was demoted and an interim stepped in who was known for being apart of plant closures. Well between tariff wars, COVID, supply issues, and now an ever-high turnover at our offshore facilities (ours too), we've managed to keep our doors open. According to what we're now told, we are one of the few profitable facilities. Luck and irony I guess.

What makes it worse is the person that was sent to shut us down has now had to take over as the PM but has zero idea what they're doing. Just makes the situation worse. And to put the cherry on top, we're supposed to get a new PM this summer. 100% likely an outsider hand picked by corporate that, again, knows nothing about the product and processes. Just a muppet to continue the M.O.

 

[TDegenhart]

It's easier to find a job while you are employed than not.

Tom

 

[EndlessWaltz]

I don't know what they make, but if it is a product people will always NEED or...want, and you KNOW the margins I would just start your own shop making said product. Don't worry about them coming after you since you can prove they had their head up their a$$ and wanted out anyways. Companies NEED guys like you and the ones that WANT to stay open will be willing to pay you and NOW. Trust me.

 

[john.k]

Possibly because a move to China is in the future.......Monty Burns..."You will be happy to hear that your jobs are safe..... but you wont be doing them."