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Arriving at a decision on this will not only help in using capital wisely, but also eliminate wastage of time and effort, and boost overall productivity

Typically in a company 3-4% of the total annual expenditure is done on IT equipment. For any company, startup or well-established, where the IT investments are not clearly defined face this question time and again – Buy all required IT equipment or to take the lease route?

Deciding on favor of either, without really understanding the benefits and problems, will definitely affect the company’s monies and overall performance. So which option is the best suited for you, and when? This piece will clear just that.

Why should you consider leasing?
The benefits of leasing equipment are manifold. Many companies look at matching their cost benefits, so that they would have smoother inflow-outflow in terms of benefits. Besides this, many companies, especially the ones in growth phase are quite skeptical about purchased equipment and technology going obsolete. Since most of them not able assess infrastructure needs and be sure about its scalability, they would anytime prefer someone else to bear the risk. This is when the lease route comes out as a blessing.

Then, when a company has a large population of small assets like PCs, notebooks, and servers – many are worried about the disposal of these assets. Most of the states in India does not allow crushing, or land filling of e-waste. This is one other reason why companies prefer leasing, because at the end of life of the equipment, it can be given back to the leasers, who can figure out what can be done with it.

When going for an outright buy, there are certain things, which even though might seem negligible, matters a lot in the long run. Owning calls for maintenance, logistics, consumables, and other such activities and expenditure which is not directly related to the core business. Going for a lease takes away the time and effort required in actually owning the equipment, thereby not only effectively using the capital, but also boost overall productivity.

Cash flow issues – CAPEX vs. OPEX
This issue is rather complicated. There is a possibility that it could be an operating expenditure or a capital expenditure based upon the accounting policy of the company, which varies from company to company.

Speaking on the capital and operating expenditure implications of going for lease, Srinivas Chakravarthy, Country Manager, IBM Global Finance explains, “Even if we offer an operating expenditure model of lease to them, and even still it could be a capital expenditure for them.” According to him, the accounting policy of a company is only one of the parameters. There are other factors like who is carrying the technology risk. For instance, a notebook might be taken on lease on market value on an effectual interest, which means that the cost would be substantially lower than what would have been the case if bought from the market. In case of going for such a technology lease, it could be an asset in the company’s book of accounts, but still the risk does not exist in the accounting books. “One can not structure a lease to meet the accounting guideline,” adds Chakravarthy, “You need to do a lease to figure out whether it is a capital lease or operating lease. It is for each company to take a call on this, individually according to their needs.” The common market perception is apparently that going for a lease means using up the operating expenditure, whereas if an outright purchase is made it becomes a capital expenditure. While that is the perception, as a thumb rule lease cannot be classified as capital expenditure or operating expenditure.

Besides this, there are times when because of unforeseen circumstances IT infrastructure calls for an immediate overhaul. Shankar Das (name changed on request), IT strategy manager of a 100 crore company, who wished to remain anonymous told us more about one such instance. When Das took over IT of his company, the mail server did not have a firewall, and it crashed one fine day. “Our mail server was in the pits, and we could not afford a long downtime, we needed another server immediately for getting the firewall up and running. Immediate funding was required,” Das said, “Under the circumstance, we did not have enough funds remaining in the capex budget for the year, and getting the mail server up as soon as possible was also very crucial, so the best option for us was to go for lease.” It has been around a year now since his company’s leased server is handling mails. Das believes that converting the requirement into an operating expenditure, instead of a capital expenditure, amortization in the form of lease, helped his company keep the cash flow intact.

Some elements to help you decide
IT equipment is used for enhancing the productivity of the company. The simple logic is investing the funds of a company in things where the return on investment is high. IT equipment, by nature, tends to be an element, which depreciates very fast, as compared to other assets. So, the ultimate question is should you buy it? Chakravarthy of IBM Global Finance says, “It is a simple rationale. Any asset that appreciates should be purchased, and those that depreciate call for leasing. Such that it does not carry the risk unto the company’s balance sheet.”

At times on a need-to basis, lease turns out to be the best route to take. Like in case of the problem that Das faced, he opted for leasing the server because it would have taken more than 30 days to process funding and acquire the server. For him, time was very crucial, as the entire company’s mailing depending on that. Because he chose the lease route, he not only amortized the expense as an operating cost, he also got the job done in minimal time and productivity damage. On a need-to basis, one might even have a requirement of specialized equipment for the period of a project; this too is a perfect time to look at lease as an option.

One other crucial element is setting up term lengths to not extend past the useful life of the equipment. For instance, it would not make sense to lease 1,000 PCs for three years, when its known that it would depreciate significantly and could also face technology obsolesce, in say two years.

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