It’s Time to Break Your Equipment Addiction

 In this episode, Wade and Stephen discuss the pitfalls of equipment addiction among contractors. They explore how unnecessary equipment purchases can lead to financial strain and bankruptcy, despite being asset-rich.

Through the story of one contractor who experienced bankruptcy, they provide insights on breaking the equipment buying cycle, weighing the benefits of renting versus buying, and building a strategic approach to managing equipment costs.

Tune in to learn how to keep more money in your pocket instead of having it tied up in depreciating assets.

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Topics covered on this episode include:

• 00:17 Real-Life Consequences of Equipment Addiction
• 01:04 Understanding the True Costs of Equipment
• 01:59 The Psychological Rush of Buying Equipment
• 03:16 Economic Conditions and Equipment Value
• 03:55 Renting vs. Buying: A Financial Perspective
• 05:11 Strategic Planning for Equipment Purchases
• 11:39 The Profit First Approach
• 18:44 Creating a Recovery Plan for Equipment Addicts
• 21:10 Building Wealth Beyond Equipment

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Wade Carpenter, CPA, CGMA | CarpenterCPAs.com
Stephen Brown, Bonding Expert | SuretyAnswers.com

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TRANSCRIPT

[00:00:00]

Wade: Ever justify buying that shiny new excavator when your old one still runs fine? Like a toolbox that’s overflowing, but missing what you actually need. Equipment addiction leaves contractors with plenty of assets, but no cash.

Today we’re staging an intervention about your equipment addiction. We’ll share how one contractor filled his yard with impressive machinery, only to lose everything in bankruptcy. You’ll learn how to break the equipment buying cycle and building strategic approach that keeps money in your pocket instead of tied up in depreciating assets.

This is the Contractor Success Forum. I’m Wade Carpenter with Carpenter & Company CPAs, alongside Stephen Brown from McDaniel Whitley, Bonding and Insurance. Stephen, what’s the most unnecessary piece of equipment you’ve ever seen a contractor buy for tax reasons?

Stephen: Oh, well, it’s usually airplanes, things like that. Airplanes, helicopters. But there’s also some contractors that can be working on or near the water that,it [00:01:00] bought some pretty superfluous boats. But here’s the thing. Shiny and exciting versus depreciating assets that deplete your cash flow.

I wish you didn’t have to ruin this whole topic, Wade, because everybody loves beautiful shiny equipment. I love to insure it. It’s fabulous to watch it work. And the hands of a maestro can make a backhoe dance. It’s beautiful. It’s likewatching the ballet or something. But I see so many of my customers just get going too fast.

Wade: Yeah.

Stephen: And they get it and they like it, and then they have it everywhere.

And it’s one thing if that equipment’s never at their office. If it’s never there and it’s always out on the job, it it’s certainly makes a lot more sense. But, how do you get off the cycle when you’re on it?

Wade: Well, I know this is probably an unpopular topic, A lot of people, either, we’re trying to avoid taxes because we go buy something and they say, well, my CPA told me to buy it. [00:02:00] But you know, a lot of contractors really have this psychological rush of buying new equipment, and they justified it in their brain.

You know, the story in the original Profit First, Mike Michalowicz talks about the story of Ernie, his yard guy that was gonna fix his chimney, and then, he starts doing his gutters and those kind of things and he starts buying more equipment just to be able to do this. Saying, Hey, someday I’m going to need this, or I can use it on another job. Well, I’ve seen too many contractors become asset rich, but cash poor. And sometimes when you know things are not going well, or things slow down, that can cost you a lot of money. So I don’t know. What’s your thoughts on that?

Stephen: Well that’s, that’s true. And then when you do need to liquidate it, you’re gonna get so much less for it than you think is fair market value. Unless for some reason the conditions are absolutely perfect. And then you have the economic conditions where it’s not the sales price, the fair market value of the equipment, but it’s the fact that there’s just not enough [00:03:00] work to keep the equipment busy.

Wade: Yeah. And again, there’s other things to this. I know a lot of people, well, we can value having that nice shiny pickup truck roll up on the job. But a lot of people, like,the heavy equipment guys, say, they figure, hey, I’m building wealth in my equipment. But, after the great recession, 2008, I think a lot of that stuff’s fading from people’s brains.

But, we saw people where they would dump all this equipment on the market and they couldn’t sell it. Or they’d have to actually bring money to the table. And so, they equate wealth with their equipment, but a lot of times that equipment may have some debt on it, and you can always justify hey, the payment’s gonna be cheaper. The interest rate is nothing. But something that we see all the time, they forget about what it costs to insure it, what they forget about what it costs to maintain it, and the fuel and everything that goes into it.

Stephen: Sure. It’s so many variables. I mean, as an accountant, you, could give a simple spreadsheet analysis [00:04:00] to, the facts of, purchasing versus renting equipment on a project. You can definitely,do an analysis of the cash flow, depreciation, the tax complicant. That’s what you do day in and day out.

But it seems to me like my more successful contractors are renting more. They’re telling me that, the mechanics are better. When they rent a lot, they’re basically VIPs with those rental companies and, they just don’t have as much downtime. And they’ve also built in to the exact project cost and the jobs they’re bidding, so they’re not burdened with an overhead on equipment.

I’ve also seen a lot of contractors, they just don’t put the right job expense for their equipment that they already have a note on or that they already own. You know, the whole point of depreciation is just to say, when this equipment is depreciated, we’re trying to fund the fact that it’s being used.

A lot of contractors just don’t [00:05:00] understand that concept. For example, you don’t have a car note. Are you putting money aside when that car wears out to buy a new one so you don’t have another car note? I see that happening with contractors, Wade.

Wade: Yeah, and that was one place I was gonna go with this, with the upgrade cycle. But, I also see it like sort of, my wife. She goes and buys something at the store. And it’s like, okay, well, why did you buy all this? Well, it was on sale. Whether it’s groceries or whatever.

Well, if we never use it, if it goes bad, then what have you really saved? And the way my wife might justify buying something like that, or clothes or whatever, it was on sale. As this nice, really expensive handbag, but it was 50% off. Well, I think contractors, sometimes it may not be the same way, but hey, it was at the auction and I had the cash in my pocket.

Stephen: You are getting an extra incredible deal at the trade show, Trade shows, just make you crazy. And, a good salesman really knows what buttons to push. They probably [00:06:00] know you and they know what you want and what you may need. And they talk about the projects coming up and what your competitors are doing.

And, you basically can’t afford not to buy it, you know?

Wade: There’s several signs that you may have these equipment addictions and there’s time and place for it. You do need some equipment depending on the type of construction you do. You need something to do the job. But I guess what I’m hoping people take away from today is like, Do we really, truly need this? What is it truly costing us?

And I’m working with a contractor out in the Midwest right now. They have three more trucks than they have people. And well, somebody may need to go somewhere, or, something like that.

You don’t really need the trucks. So why are you buying it? Well, I needed a deduction. Well, why are you so far underwater? You haven’t turned a profit in five years.

Where I’m going with this is what is the true cost of owning these things? Beyond that sticker price, the maintenance, insurance, all these things that go into [00:07:00] it? And what does it really cost?

You actually brought this up beforehand, was the utilization, but you know, what are your thoughts on that?

Stephen: I don’t know. You’re in debt to buy something, okay? Now everyone on this planet needs to be in debt to buy something at some point in their lives. And in the construction industry, it is certainly normal and practical to purchase equipment you get a good deal on that, you know how to service that you feel good about and is available and ready to go and use it every day.

I think of a lot of specialty subcontractors, it just, it certainly makes sense. And also you may not have the kind of clout to be able to get all the rental equipment you need when you need it or with the right attachments that you need. So there are reasons for it, and we’re not saying there aren’t, but you’re right, Wade.

There’s just a lot of times that contractors,go through a stage where they’re just buying a lot of equipment. And almost all of them will [00:08:00] tell you later they wish they hadn’t of. They really do. Because next thing you know, you’re buildingbigger, barns, maintenance sheds, you’re hiring more mechanics. You’re taking on,extra cost,just to have a lot of equipment. And,your, your equipment, you, you, you want it to be a reflection of you and your company. When you have nice, beautiful, sparkly, clean, great, gorgeous state of the art equipment out on job site, it makes you look good. I get that.

But you can rent the same stuff that’s just as sparkly. I’m just saying.How you amortize that and can utilize the actual cost in bidding your work and in the projects that you already have in the work at the time you’re trying to decide whether to buy or rent, it is just something, I don’t know. I would say call you Wade.

Wade: Well, utilization rates, there’s several ways you can calculate it. And depending on what you’re talking about, are you talking about excavator or, a bulldozer or whatever it is. Too many people, [00:09:00] okay, when they’re buying it, they think about, here’s just the payment.

Stephen: I just gotta cover this payment. And it’s so much cheaper than renting that equipment. But renting the equipment is like keeping up with the overhead, as far as the maintenance on it, those kind of things. You don’t have to worry about it. But know, you may still have that costs but you can’t use it in the winter or whatever it is, if you don’t have work, three months outta the year. Well you gotta factor all that in. You gotta cover it somehow. What you were talking about before that depreciation, well you, maybe you took that depreciation up front, but you still have that monthly note payments you gotta continue paying on. So what is the opportunity cost of that capital that’s tied up? And if you get into these, seasonality and slower times and it’s not running, are you able to keep your people? Are you able to keep all that equipment??That kind of stuff. Or if you had that capital, could you have gotten a bond or something on–Right. That opportunity cost might be the fact that you don’t have any working capital.

Wade: [00:10:00] Right.

Stephen: Because you bought that equipment.

Wade: Well, you and I know unfortunately contractors shoot themselves in the foot sometimes with that. When we start looking at things at the end of the year and you’re still only focused on what is the tax picture look like, but you forget about the fact that you’re about to wreck your bond picture or your banking picture. You can’t renew your line of credit because your,ratios are so far upside down. That’s where it becomes a lot of problem.

Stephen: Yeah, well, debt is debt. And even if you have the cash and you buy the equipment at an auction for cash, you’re depleting that, cash an asset that you can turn into more cash. That certainly makes sense.

But. I think that’s kinda the way to think about it, because it is just so easy to buy a lot of equipment.

Things are going great in your area of operation, and the sky’s the limit. And you have to say, now jobs generally are running longer than they used to, since Covid. A project that used to be a year and a half is, two [00:11:00] years now. a project that was $2 million. pre covid is $3 million now.

It’s just the whole perspective of it. And you can say, look, I’ve got a project for three years. I’ll keep this equipment working during the term of this project and this project will just buy me a piece of equipment that I can probably get 10 years out of. Well, I should do that.

And that makes sense, right? It does.

Wade: Well you say that, but then you know that also goes back to some of the same things. It’s like the owner never takes what they want to take home. They never got the cash in pocket.

And part of this, the whole episode, is really one of the chapters in my book. And I’ve sort of approached it very differently. Actually this is one thing I really wanted to talk about today was the way I see it. The original Profit First, they basically took out Materials and Subs. And in the book, I introduced the Job Expense where it is not just materials and subs, but you’ve also got this equipment. You’ve got things like bonds, you’ve got, permits. And some of that can be very [00:12:00] expensive.

I think of job expenses as cash out on your job. And this is where a lot of people really can’t wrap their head around it. But you know, like on your financial statement, you would expect that equipment would be a job cost. But the way I see it, if you rent that equipment specifically for that job, it is a job cost. A job expense. From a cashflow standpoint. If you buy that equipment and you’re paying them a note on that, I look at that from the opex side or the operating expense, or said differently, as an overhead expense, and I don’t know if that makes sense to you the way I said it.

Stephen: I think everybody does. Do you have the process in place to allocate that piece of equipment as a job cost if you own it? Most people don’t. And Wade, one of the most successful contractors I ever met that was talking to another contractor customer of mine, giving him advice, said literally if I have a shovel, I put a cost onto [00:13:00] that shovel. Because I’ve gotta replace that outta my pocket if I hadn’t planned for it.

I just don’t think a lot of contractors are set up that way with larger pieces of equipment. Certainly without smaller tools. But that’s the kind of,ability to analyze cost and keeping profits that made that Contractor a lot of money. And they sold their company and retired.

Wade: Well, again, from a book standpoint cash flow with regard to equipment is very different from what I would say as a accountant, an auditor, if I was doing a formal financial statement, that would definitely be job cost.

But if you think of your operating expenses as your overhead, you gotta continue paying that note on it.

Well, okay. You think about it very differently. Your gross margin on the pnl is going to be very different from your gross margin the way I’m looking at it with job expenses.

So, again, the way I approach it in the book, number one is sort of different there. [00:14:00] But one of the things I’m, trying to advocate is, especially if you’re a heavy equipment guy or you got a lot of money tied up in equipment,a lot of people tie money in pickup trucks and it’s easy to get over a hundred thousand dollars on a pickup truck now.

You gotta replace that stuff. Instead of having just okay, well big money comes in and, oh, I got money now I got 50,000 in an account, I can go spend it at the auction or something. Well, is that the smartest thing to do when you know you spend that money and then next week you can’t make payroll?

Stephen: You know, Wade, there’s, a reason why bonding companies don’t give you bonding credit for the value of your equipment. There’s a reason for it. First of all, they don’t know what, truly what your equipment’s worth from a cash standpoint if you liquidated it immediately, but they can’t think of it that way.

They have to think of you running your business based on pure job cost and maintaining profit. That’s what they’re looking for.

Wade: I think that’s smart. The fact that, if you’re, truly [00:15:00] looking at what you’re spending and if you want to have some profit in your bank account at the end of the year, you need to have a plan for it. So, I’d advocate, especially if you spend a lot of money on equipment, you have a capital expenditures bank account in the profit account. Or CapEx, the way I call it. And you drip money , in there or, say you’re, a heavy,highway equipment, that kind of stuff that takes a lot of maintenance and you don’t want to get caught with your pants down with the, huge repair on the tracks on your excavator or something like that.

And. you know, your workers’ comp bill happens, and that’s in your slowest part of the year. It’s like it can all come crashing down.

, Again, I won’t go all into all the concepts in the book, but you know, planning for maintenance, repairs, replacements. And again, having a specific capital expenditure account can help avoid that temptation to go buy it. It’s like, okay, well we don’t have the money to spend. But when you got it all in one bank account and your retainage [00:16:00] comes in and you feel like you’re on top of the world, you feel like you can go buy anything. And then again, the next week you’re struggling to make payroll.

Stephen: Well, either way, the Profit First type of business model helps you make that decision. You know, you can do what you wanna do with your money. If you wanna own a bunch of equipment, that’s your business. But what does it cost you? What does it cost you? And, Wade, highway contractors do a lot of asphalt paving, stuff like that.

They’ll just tell you they have to own a lot of equipment. It’s an equipment intensive industry but they’re using it 24/7 and it just, it’s a hard business to get into because you have to have so much equipment.

Wade: Well, the other part of this is that, too often the owners are not taken home. You know, they get behind on their taxes, they get behind on their mortgage ’cause, but at the end of the day they go buy this equipment and then they are wondering why. Or maybe they actually did have some profit and they go just to not pay taxes, but they’re never building wealth.

[00:17:00] And I guess what I’m asking our listeners to consider today is just if you’re always spending it out… I actually have been training some people over a couple of years of, we put some money aside at the end of the year. And they got some cash. It was like, okay, now I want to go buy some equipment. That’s my reward for it, and I’m investing in my business.

Well, is that really investing in your business? Are you really profiting because you just took it and you reinvest? okay, well you reinvested it and you keep saying, someday I’m gonna be able to take home a real paycheck. But you’ve never got the reserves built up. You can’t get the bonding capacity you need. Those kind of things. That’s what I want you to think about.

Stephen: You’re eventually gonna get to the point where you’ve got enough capital to operate your business as efficiently as you wanna be and to grow it or to deal with economic downturns. And then that’s the point where you can take a lot of money out of the company. And we’ve talked about that lots of times.

 It’s kind of the theory of when you’re at the casino, shooting craps. You decide how much [00:18:00] you’re willing to lose, and, if you lose it, you go home. If you double your money, you put it in your pocket and everything else is just monopoly money. That’s fun.

Well, it’s the same with the construction company. You’ve figured out how much you’re gonna risk and you’ve got enough capital in there to fund the operations of your company to continue to make more capital and more profit for you. Then it is time to take your money off the table.

Wade: Yeah. But again, I see too often they still never take on what they should. And I guess let’s kinda move on to like,if you’re an equipment addict, let’s create a recovery plan, if we will. So how do we, how do we do that? just throw throwing a few things out.

Stephen: I guess the first thing to be, it was just stop, stop buying it.

But how do I do that? I’m an addict. Wade, I can’t stop.

Wade: Well, yeah, I mean, you know, you go, figure out part where we’re going with this is like figuring out whether you need it or not.

Stephen: Right.

Wade: But you know, just go do an equipment audit. Do you really need that equipment? Do you [00:19:00] have equipment that’s sitting there not being utilized? Should you sell off those underutilized.. instead of getting caught with your pants down, everything broke down and you got all of a sudden gotta go buy something new, well, start putting aside money, equipment replacement schedule. And dripping money in there so that you’ve got it, you got your down payment when you need it.

Stephen: All right.

Wade: If you’re renting the equipment versus buying equipment, well think about that rental place, and what it would cost you when you’re bidding your jobs. Just use those same type of equipment costs, top that into your bid. And the other part is, I do think this is an emotional attachment for some people. I’ve seen contractors with yards full of equipment that’s just collecting rust and that kind of stuff. So again, it’s a, Catch 22, do you really need it? And I’m not trying to,I don’t know if we’re gonna turn off some of our contractors ’cause I know they, they love their equipment.

It’s an asset. If it’s turning money for you, then that’s what it’s supposed to be doing. So [00:20:00] hopefully that made a little sense.

Stephen: Yeah. I think your main point is, a really good one, are you taking profit out of your company? What’s keeping you from taking profit out of your company? Right now, today? Is it equipment? Or is it something else? Because that’s the name of the game. It’s to take profit outta your company.

And the whole idea of your book, Profit First for Commercial Construction, it’s just right on the money. It helps you in every aspect of running your business. It helps you think about how to take money out of your company. How’s the best way to do it? How’s the best way to plan for it? What are the pitfalls that keep you from doing that? And, buying versus renting equipment versus buying older equipment at auction.

Whatever involves any level of debt or risk is always something you just have to consider. ‘Cause it keeps you from taking cash outta your company. Profits.

Wade: Yep. And again, we’re not saying that you shouldn’t buy it, we’re just saying [00:21:00] think about why you’re doing it and what you’re doing. And if you bought that truck on December 27th and write it off on the taxes right then and there, but you got another seven year note on it, it is just, I guess we’re asking the question, is this a strategic asset?

Or a status symbol that you’re more worried about the status symbol?

Stephen: Yeah. And thank you. Can I step away from this decision process and think about it logically and then come back to it? Then your decision’s probably the right one. Either way, wouldn’t you say?

Wade: Yeah, just, focus on the equipment. Is it really generating you revenue? Is it helping you build your wealth outside of your equipment yard?

Stephen: Yeah.

Wade: If you had that cash and just rented it. Or you, you spent all your cash up there. What are your alternatives? Like if you invested in something else, what else should you consider?

 Have you actually put some money in your retirement plan? And is your retirement plan sitting on your yard? Well, is that truly your retirement plan that you shouldn’t depend on?

Stephen: Oh boy. Yeah. That’s so [00:22:00] boring compared to buying new equipment, but it’s so true. And a disclaimer for the end of our podcast would be that, some of you might legitimately have a problem and, we’d like you to go to, Equipment Anonymous and get, the help you need. I think this is a great topic, Wade, because, as always, it’s a series of questions you have to ask yourself and, it’s easy to get out of control with your equipment because if you own $5 million worth of equipment, then you’re a $5 million contractor, right? No, no, no, no.

If you do $5 million in sales, you’re making $5 million in Profit? No, no, no, no, no. So, we’re gonna keep coming back with that kind of theme, aren’t we? ‘ cause it just makes sense and we just want people to know that.

Wade: Well, your point’s well taken and you, again, we’re not talking about like you shouldn’t go buy something, you shouldn’t go into debt. But what I’m hoping you’re thinking about is if this is really the strategic move that I should be making. And [00:23:00] I am I really building wealth in my business?

If nothing else, if we made you think about it today, maybe we did our job.

Stephen: Okay. Thanks Wade.

Wade: Okay. With that. if you got some thoughts on that, I’m sure we might hear some feedback on that. Good or bad, we’d love to hear it down in the comments below. we always appreciate you listening in. if you would, if you followed us this far, we’d appreciate it if you’d like, share, subscribe, do all that stuff.

We appreciate it. We posted new episode every single week and we thank you for being here and we’ll see you on the next show.