Getting a Capital Purchase Approved for a Cost Center

The most important thing to remember when submitting a proposal for new equipment or software is to present your Business Case.  In other words, how is this investment going to help your company’s bottom line?  Will it save money by reducing costs or by increasing revenue – or, ideally, both!

Profit Centers vs.Cost Centers

A profit center includes items the company charges their customers for that are higher than it costs to run the department, therefore increasing the company profits.   This could be manufacturing, sales or technical support.  A cost center performs functions required by the company, but does not produce revenue greater than its costs (may not create revenue at all).  This might include inventory management, purchasing, facilities management and accounting.

It’s easier for a profit center to justify new purchases than a cost center, so if you are running a cost center you must make a good Business Case for your request.  You can affect how management perceives the purchase request by how you present the purpose and result of the new equipment or system.

Justifying the Expense

There are a couple of ways to justify the cost of the proposed system.  You could describe how you will save the company money immediately by implementing the system.  Or you could justify it by how fast it will be paid for by providing such benefits as increased productivity, improved customer service, or the increased ability to generate revenue.

1. Are you spending money to save money?

This is called “cost avoidance”.  Explain how you will save the company money by using the new equipment or software.  Use “hard” numbers.  For example, it will save “x” number of hours per month that translates into reduced labor costs.   Or it will increase the utilization of tools, such as dies for manufacturing, by scheduling maintenance rather than delaying production due to unmaintained tooling.  (If you can refer to specific job delays this justification will work even better

2. Outline Return on Investment (ROI)

This will define in quantitative terms how long it will take to recoup the initial cost for the new system. The timeframe may be months or years, depending on the cost of the investment. Obviously, the faster the return the easier it is to justify. Use industry statistics in this portion of your Business Case if you can find them. Check online sites about your industry or check with industry trade associations who often do surveys of their members.

Don’t assume your manager already knows what you know.  You are closer to the process and are more affected by improvements that the new investment will bring.  The next article will describe the recommended structure of a good Business Case.

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