Is New Plumbing Equipment Worth the Investment?

Before buying, determine profit potential, how a tool can grow your business or if renting might be a better option

Is New Plumbing Equipment Worth the Investment?
Anja Smith

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ROI, or return on investment, is sometimes tricky to calculate in plumbing. The term refers to the potential future profit an investment such as new equipment, tools or machinery can provide over time. For example, imagine an estimate on a job that requires a specific doohickey. You don’t own this tool and would have to purchase it to complete the job. Questions, such as the initial expense and whether you’ll ever use it again, drive the decision to accept or turn down that job and buy the tool. Another factor might include who the customer is — a potential big fish, your best client, or some guy you’ve never heard of. In this way, equipment, tools and machinery open and close doors in the plumbing industry every day.

Not only can that, but the right equipment and tools be a game-changer for job efficiency. The speed and safety at which your team performs has a real dollar impact on your business. “Time is money”; true enough, and fatigued employees can result in serious expenses.

Tools and equipment often translate to working smarter rather than harder, saving your team from expensive slow-downs, burnout, and injury.

In a perfect world, we could justify buying every newfangled doohickey tool that might make our jobs easier. But that way can lead to madness and a never-ending, profit-sucking black hole. Instead, new purchases should be prioritized and carefully considered for profitability and growth potential.

The formula for ROI is deceptively simple. I’ll share it with you in a bit, but first, let’s consider what questions should play into the data:

How fast can I get my money back and turn a profit?

A tool can pay for itself in one job or in 50. Obviously, the faster your company recoups the cost of that investment and starts profiting, the better. If you are well-acquainted with your financials, you can do some quick-and-dirty math to figure out your ROI period and potential future gains.

In the case of job efficiency, this estimate can sometimes be extremely difficult to decipher. You are talking about some serious math equations and the application of lean manufacturing principles. I’m not suggesting your small business worry about time studies and the calculations of employee productivity down to the tenth of a second. Just start with some estimated round numbers. For example, is it worth it if it saves your employee 10 minutes every day?

Where ROI is most easily calculated is when you can bill the equipment directly to the customer. Don’t make the mistake of absorbing every new equipment purchase into your overhead. Plumbers seem to have no problem passing along a bill for rented equipment to the customer, yet stop charging for the use of the same machine once they own it. The customer would have to pay for that equipment either way, so don’t undervalue the risk and expense that your company is taking on. Not every tool or machine can be billed directly, but, be cognizant of when this is appropriate and take advantage of it for a faster ROI.

What is the true cost of ownership?

Many times, the cost of equipment lies more in ownership than in the initial purchase price. Employee training, storage, insurance, maintenance and repair are all vitally important ongoing expenditures. Real-world ROI takes these complex matters into consideration.

If the monthly ownership cost of the equipment is higher than the profit it is earning, then the initial purchase price doesn’t matter – it’s a bad decision.

Is there another way to proceed?

Knowing the difference between need-to-have and nice-to-have is a conversation for you and your therapist. But, for the times when that line is blurred, a little ingenuity can go a long way in saving you some serious cash. Don’t be afraid to beg, borrow, build or rent your way to getting the job done. Renting is one way of trying out a tool for future purchasing decisions and is well-suited to one-off situations. If this is the case, while you are on hold for rental prices, take a few seconds to do a gut-check that you are the best company for the job. If you don’t have the equipment, sometimes that is a sign that you are outside of your wheelhouse. In this case, punting is the right strategy to save you from a headache. It might also save your reputation in the long run.

Will this job or customer help my business grow?

You’ve heard the saying, “You have to spend money to make money.” That’s never been truer in any industry than in plumbing. One of the times when spending money on a new piece of equipment or tool can make a long-term difference to your company is the influence of the customer. While we never want to lose money on a job, a well-connected customer who can provide you with repeat business might be worth breaking even for once in awhile. Where you draw the line again is realizing when the job is outside of your core competencies or doesn’t align with your skill set.

At the same time, this could be a signal that there is a need for a service or equipment type in your area. If an investment in new equipment will allow you to be first to market, that can be a strong justification for moving forward, especially if this equipment or service complements your current offerings.

As small business owners, it can be difficult to gauge things like market demand for new products or services, so there is some risk here. We often have to go off of anecdotal evidence, such as multiple customer requests. One good way of doing this is to have your dispatcher track jobs you turn down, just as you track jobs you book. Looking through those service requests for patterns might show you where a good equipment or tool investment might be hiding a lucrative new service offering.

How much risk can you tolerate?

If you are worried about the ROI on a piece of equipment, it is probably because you consider it expensive. The definition of expensive fluctuates depending on the size of your business, its age, cash flow and credit rating. A new opportunity is great, but not if it over-leverages you to the point that you can’t meet payroll. Risk is perhaps the greatest thing to consider for ROI, because it is all moot if you can’t pay the bill. Paying yourself, your employees and your current creditors should take priority. No single purchase is going to save your business. Taking carefully evaluated risk can make a strong company stronger, but it can make a weak one crumble.

The Formula

I promised to share with you the formula for ROI. The textbook formula is gains minus cost, divided by cost. This applies in plumbing as easily as anywhere else, but it doesn’t tell the whole story. Make sure that the cost and gains values are true and reflect your unique situation. And sometimes, you just have to follow your gut and take a leap of faith. Just make sure it is a calculated one.

About the author: Anja Smith is managing partner for All Clear Plumbing in Greenville, South Carolina. She can be reached at anja@acpupsstate.com.



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