The Hidden Expenses Most Monument Companies Forget About

Hidden costs lurk deep in the shadows of your shop. Unseen yet ever-present, they are often ignored by most small business owners. Most know better than to ignore these gruesome, hidden costs. Yet, they turn a blind eye and choose to do so anyway.

The culprit of these hidden costs is often sentimental. It is typically older than all of the employees combined and at risk of extinction. No one knows where it came from, how it got there, or when it made its appearance. And it is….

Old—terribly old—equipment.

Ignoring The Costs

If you have old, worn-out equipment hanging out in your shop, raise your hand. Raise that hand really high so we can all see. Come on, go ahead, put that hand up in the air and wave it around like you just don’t care! (Because you know you don’t- you love your old stuff!)

Now, I had better see hands go up all around the country. Any good monument builder knows it is an unspoken rule of operation to use equipment dating back to the 1800s. Am I wrong?!?

Of course there is nothing wrong with using old equipment. In fact, it can have major advantages when it comes to maintenance and repairs. Not to mention,  older equipment is often completely paid for!

But, let’s face it, there are also countless disadvantages. Older equipment can lack important safety features and efficiency-creating technologies and can break down more frequently than its newer counterparts.

But the truth is, that trusty old equipment you insist on using will eventually be replaced. While everyone realizes and understands the equipment will not last forever, most do not truly plan to acquire upgraded equipment.

Lurking Costs

It’s not the old equipment itself that is the problem. It’s the invisible expenses that come along with them. These expenses lurk in the shadows of your shop and don’t involve cash at all. In fact, they’re silent players packing a powerful punch. And they are none other than depreciation expense and replacement cost.

Depreciation Expense

When an asset depreciates it loses value. And, let’s face it, nearly every business asset loses value over its useful life. But assets don’t lose their entire value the minute you put them to use in your business. They only lose a small portion of their value every year over the duration of their useful life. This is called depreciation expense.

While depreciation expense is recorded on the income statement, accumulated depreciation is recorded on the balance sheet.

Let’s start with depreciation expense and see where it is on our income statement.

Depreciation Expense on The Income Statement

Let’s pretend we purchased a new sandblaster. The cost of the sandblaster, freight, and installation is $100,000. And let’s assume it’s useful life is 7 years. (This is not tax advice. For more information on determining the useful lives of assets, consult your CPA).

If we are using straight-line depreciation, we would need to estimate the machine’s salvage price. This is the amount we might be able to sell it for when we are done using it.

The formula for straight line depreciation is:

(The cost of the asset – Salvage Price) / Useful life in years

There is no salvage price if you plan to use the machine until it dies. For the sake of simplicity, our example company plans to do exactly that.

(This is not legal or tax advice. Please consult your CPA for depreciation strategies that fit your business’ needs).

So we would take $100,000 and divide by 7. The result is $14,285, which is the amount we deduct from our financial statements each year for depreciation expense. Of course, we only deduct this amount for seven years. After seven years, we consider the asset to be “fully depreciated,” and we do not continue to deduct for it.

In the example income statement above, you can see where the depreciation expense is included in our list of expenses. The expenses are deducted from our gross income to arrive at our net income.

The $14,285 is only the depreciation expense we incurred during the year.

Now. While depreciation expense is on the income statement, accumulated depreciation is on the balance sheet. Let’s check it out.

Accumulated Depreciation

Accumulated depreciation is exactly as it sounds. It’s an account where your depreciation expense just hangs out and accumulates over the years. It is deducted from the total assets on your balance sheet to reflect their remaining usefulness.

The example above demonstrates how assets are shown on the balance sheet. You will notice the accumulated depreciation reduces the value of the assets.

Why Depreciation Expense Matters

Depreciation expense and it’s associated accumulated depreciation, though it does not involve cash, is a very real expense. And it should matter to every small business.

Depreciation expense tells you how much value your assets lost this year. The assets less accumulated depreciation tells you how much value they have left. Keeping a keen eye on this will allow you to better plan for several key business decisions, including:

• Planning for asset replacement
• Planning for vital asset maintenance and/or upgrades
• Planning for debt financing
• Planning for a business valuation

This is the point where depreciation expense, accumulated depreciation, and replacement cost all collide into one big, colorful event.

Replacement Cost

When Luca Pacioli wrote the book on double entry accounting in 1494, he knew you would eventually have to replace that sandblaster you bought from his dad. (wink, wink!) That is precisely why depreciation expense and accumulated depreciation were included in the financial accounting system. While you most likely already account for both, the real question is, do you adequately plan for replacement costs?

Let’s use the example of the sandblaster from above. You’ll recall the total asset was worth $100,000. That value includes the cost of the asset and the costs to put it in service (such as freight, any electrician/plumber/labor expenses, etc).

The thing about assets is that the cost of the asset and placing it into service is going to increase. As the asset depreciates in value, the replacement costs increase.

So, if you are using your financial statements to calculate retail prices, but fail to allow for replacement costs, you will not achieve the allowance to sustain operations at current equipment levels. By estimating the increased asset cost, as well as the increased costs to place the asset into service, you can better position your company to achieve sustainable equipment needs.

For example, let’s estimate the $100,000 piece of equipment in our example above will increase approximately 15%. In our managerial analysis, we would simply add the annual depreciation and the additional replacement cost. This results in the annual allowance we need to include in our pricing to prepare to replace assets in the future.

By including the replacement cost in with the depreciation expense in our pricing calculations, we are using our pricing to look forward toward known future expenses. Doing this ensures you will have the capital on hand to replace assets with limited debt financing, thus increasing your company’s sustainability.