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Purchasing Decisions

Leasing versus buying

As a functional manager, you may have to make decisions about whether to lease or buy equipment. Approaching the decision like a CFO will help you consider all of your options and make the best choice:

  • leasing — A lease can be viewed as an expense. Every lease payment goes through the accounting system and is counted against company profits. The main advantage is that a company doesn’t have to worry about reselling or disposing of old equipment when a lease is up. As a disadvantage, at the end of a lease a company won’t own the item, even though it may have paid the purchase price over the term of the lease.
  • buying — A purchase is viewed as a fixed asset and depreciates over time. So the value of the purchased item may be expensed over a longer period of time than a lease if the item is financed. Owning the equipment means that in the future, the company may be able to sell the item and recoup some of the cash paid out to buy it. However, if purchased outright, the expense of the company’s purchase will be immediate.

There are two kinds of leases: capital and operational. Capital leases are usually long-term and often for items like machinery, where the technology is not quickly replaceable. Capital leases give the lessee the option to purchase the item at the end of the lease. Because of this, leased items are considered assets and the value does depreciate.

Operational leases are usually short-term and more for items where the technology is rapidly changing, such as computers. This type of lease is more like a rental, where the lessee doesn’t retain any benefits of ownership. It is considered an operating expense.