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Calculating The Return On Investment Of Leased Equipment

Posted by Ryan Hendrie on 22/08/17 10:38

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In short, calculating the ROI of leasing is the same equation as any other ROI calculation, but you just need to be aware of the full, actual cost and probably need to account for risk factors associated with leasing (charges and fees).


How To Calculate ROI Generally

The gain or profit from an investment, less cost, is divided by the cost of investment which facilitated it. The formula is:

 

ROI = (Gain from Investment - Cost of Investment)        /           Cost of Investment

ROI =                                          (G-C)                                                        /                            C

 

For example, an investment in a marketing campaign costs £1,000 and £1,500 worth of sales can be attributed directly to that marketing campaign:

Gain from Investment =          £1,500

Cost of Investment      =          £1,000

ROI =                                      (£1,500 - £1,000)                    /                       £1,000

ROI =                                                  £500                            /                       £1,000

ROI = 50%

(£500 being 50% of £1,000)

 

This is obviously a very simplistic example but is used to illustrate the point. The ROI of leasing explanation (which follows) will aim to highlight the things to consider when leasing your assets, as well as what options are available to you for reporting the information.

 

Why You Need To Calculate The ROI Of Leased Assets

Like any aspect of your business, knowledge is power. The more you know about the fine details of your lease portfolio, the more you can make sure it is optimised to run as efficiently and profitably as possible.

Knowing the ROI of your leased equipment or other leased assets forms part of that.

Doing this can help you to identify which leases are performing well and which aren’t doing quite so well. You can then work to rectify what’s not working and make your portfolio more profitable.

 

How To Calculate Leasing ROI

When it comes to forming the G and C for your ROI formula, there’s obviously a lot more work involved than just headline numbers as were used in the above example. And, for leased assets, there are particular considerations to be mindful of.

For instance, the whole cost of the agreement needs to be calculated.

This includes the total sum of the termly payments, an estimation of any additional charges which you know you’ll incur (such as cleaning and other maintenance fees, return courier charges, and the like), a risk assessment of penalty charges (make-good repairs or any lost parts, for example), regard for useful life of the asset, a view of end of life costs such as disposal or return and you may wish to include managerial or administrative costs.

In the other half of the ROI equation, the gain from your leased assets could be particularly hard to quantify. Completing this part of the equation may depend on how your lease portfolio is organised and divided. For example, you may need to look at, say, vehicular assets and computer machinery separately in some reports but together in another.

This means that you can add calculating ROI to the many time-consuming aspects of managing your company’s lease portfolio.

 

Further Advice On Whether To Lease

These calculations may suggest that a better ROI could be achieved from a capital purchase rather than a lease agreement, especially if you place too much emphasis on the risks of leasing.

However, if you shift some of that emphasis to the many benefits of leasing instead, including the more intricate factors such as certain potential tax advantages and cash flow certainties, leasing could be more favourable.

Even when considering the implications of the ongoing changes to lease accounting rules and regulations, leasing may still prove the right solution through an ROI calculation.

 

Lease Accounting Changes

The two large accountancy bodies, FASB and IASB, have spent the past decade working with accounting industry experts, think tanks and general users to table some pretty huge changes to the way lease portfolios have to be accounted for.

Amongst the many rafts of changes within IASB’s IFRS 16, for example, are redefining what the definition of a lease is, which types of leases are exempt from reporting changes and, possibly the biggest in terms of impact, moving all leases on balance sheet (apart from those certain exemptions just touched upon).

With the majority of companies still not close to consolidating their lease portfolio data and producing the necessary audit trails and reports, coupled with the need to conduct a full investigation and analysis of the ROI of a company’s leased assets, it’s no wonder that more and more businesses are searching for a piece of software which can help them.

If you'd like to find out more about the impending changes to lease accounting and dicover what you are facing when it comes to the challenges the new standards present businesses the world over follow this link.

See more on lease accounting: IFRS 16 Overview and Lease Accounting Summary

Further Reading:

In order to get a better understanding of the intricacies and benefits offered by leasing then open our free guide to leasing below.


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