Investing in Equipment

For most coffee businesses equipment should be an investment, not a marketing tool, and that is why it is critical for coffee businesses to understand the financial impact of significant purchases on our profit and cash flow.
A typical espresso machine can be fairly assessed at a 4-5 year lifespan given regular maintenance. That lifespan can be increased indefinitely with complete rebuilds. If we purchase an espresso machine, we are expected to depreciate it over 5 years until it ceases to be a capital asset on our balance sheet. The fact that it's balance sheet value is depleted is offset by the fact that it is no longer a long term liability in the form of a bank loan. If we regularly maintain our machine, we have the potential to benefit from the utility of a machine which has already been paid for and depreciated. Think about driving around your 5 year old car...no payments...same utility.

Lets compare two new espresso machines, one costing $5,000 and the other $20,000.
We will assume that the $5k machine is capable of producing the same quantity of espresso beverages per hour. We will also assume that the $20k machine does produce a better, more consistent espresso. I don't want to explore the technical merits of one machine over another, just how the cost impacts our profitability.
In both cases, the machinery will be financed at 10% (high rate for some, low rate for others), although it is always better to purchase outright with cash accumulated from profits. Obviously paying $5k cash is significantly more accessible for most coffee businesses than $20k, but we will assume both are financed.

Loan amount: $20,000
Interest Rate: 10%
Loan Term Months: 48
Monthly Payment: $507.25
Total Paid: $24348.08
Interest Paid: $4348.08


Loan amount: $5,000
Interest rate: 10%
Loan Term Months: 48
Monthly Payment: $126.81
Total Paid: $6087.02
Interest Paid: $1087.02

Look at the total burden to the company for each machine represented by the Total Paid number. The difference in purchase price is $15k but the total financed burden is $18,260.98 or an extra $380.44 per month over 48 months. The same utility is withdrawn from the machine in the form of beverages per day, but one machine cost significantly more to produce those beverages. I have already discussed the impact on the balance sheet, but the income statement is also adversely affected by the burden of lease/loan payments and amortization expense, reducing profit at the end of the year.
Choosing a $20,000 espresso machine over a $5,000 or even $10,000 is likely tied to an expectation that the equipment will elevate status, quality perceptions, and increase revenue. These are marketing decisions since identical utility from a less expensive option was foregone in favour of an effort to increase awareness/buzz. Coffee Companies with competitive advantages based upon location, skilled baristas, exceptional service etc, don't need to constantly upgrade equipment in order to maintain buzz. Theoretically I would argue that any expense over and above significantly cheaper options should be identified as Goodwill rather than Capital Assets.
Choosing the more expensive option is also a strategy which is a long term expense, since every year a newer, more sophisticated model with more buzz will hit the market. Heaven forbid that your closest competitor engage in similar strategies, resulting in an espresso gear arms race ;) Review your purchases, remember that every dollar added to General and Admin Expenses is a dollar of reduced profit. Every coffee business needs to purchase equipment, just make sure that your purchases impact on financials are known before the decision is made. Last, if you are expecting a jump in revenue when you make a luxury purchase, measure it, confirm or debunk it and learn from it. If it doesn't increase your revenue, you have just made yourself significantly poorer.