Published February 2002

Match up money, biz strategies

If the word “congruent” brings on unpleasant memories from high school geometry, get over it.

Managing the financial part of your business means a lot more than paying the bills and the taxes on time. Good financial management always keeps the money side of the business matched up perfectly with the business strategy — and analysts call this “congruent.” And the good news is that it doesn’t hurt a bit.

One of the key areas to keep lined up is liquidity — the cash and near-cash position of the firm. Obviously, some liquidity is needed to support the routine payments to suppliers, workers and others. And some, of course, should be kept in reserve for unexpected events and expenditures. Beyond that, though, the amount of cash held by the firm should be determined by what strategy the business is taking.

One example of how business strategy and finance should complement each other shows up in “lease vs. buy” decisions. These decisions usually have two parts: a bottom-line cost, which is driven by the math, and a liquidity, or cash-flow, pattern. You have to pay attention to your costs, obviously, but you shouldn’t let the math make your decision for you.

Your business will work better if you remember that liquidity and cost are independent factors in the lease vs. buy decision. There may be a perfectly good reason, for example, why you might choose the higher-cost option — and usually it is because the liquidity impact is a better fit, and is more congruent, with your business strategy.

To get an evaluation of how good the fit really is, you need to get past the immediate attraction of leasing compared to buying.

No matter what the asset is — equipment, automobiles or buildings — the smaller initial outlay of cash and the lower installment payments always make leasing look good. (That’s why leasing companies are always eager to provide you with comparison sheets and even computer-driven comparison programs you can download from their Web sites.)

Leases also usually have the advantage of accounting and tax simplicity. Because ownership isn’t transferred, the payments are all deductible expenses, and you don’t need loan amortization tables or a financial calculator to figure out what portion of each payment goes to principal and what goes to interest. And, of course, a lease frees you from the hassle of selling off the asset when you no longer need it.

Don’t get carried away by the initial attraction, though.

Sometimes leasing can look a lot better in the short term than the long. In fact, the key variable in whether leasing or buying is more attractive turns out to be time.

Most lease-buy comparisons are made within the term of the lease — usually under five years. But if the product or service the business sells has a long lifecycle and the business wants to establish its market position and maximize its revenue from this stable product, it often makes sense for the firm to purchase rather than lease — even though it looks more expensive in the short run.

You can see this principle at work in even a straightforward lease of an automobile for either personal or business use. If you plan to keep the car or truck significantly longer than the period of the lease, it generally costs less to buy.

This situation even comes up in retail sales, which is traditionally a “lease everything” business but can benefit when applying a longer-term perspective to lease vs. buy decisions.

Nothing in real estate or in retail sales ever stays the same, and when a retail business is located in an area that is prospering — so that your sales go up — typically your rent is going to be raised each time the lease is renewed. In contrast, if the area begins to decline, your lease payment will remain constant — but look bigger as your sales shrink.

The only way to bridge these ups and downs is to purchase rather than lease and stabilize the costs of “being there.” And when you look at the businesses that have survived substantial change in urban or suburban areas, a disproportionately large number of them turn out to own their own real estate.

The lease vs. buy decision is just one example of how liquidity and cost issues should be aligned with the overall business strategy.

A mismatch that gives you a short-term financial plan with a long-term business plan almost always raises your costs and lowers profitability. The opposite mismatch, of long-term financing and short-term business strategy, puts pressure on liquidity and often prevents a business from making the strategic adjustments it might need to survive in a changing market.

For the best financial management, think “congruent.” You’ll like it.

James McCusker, a Bothell economist, educator and small-business consultant, writes “Your Business” in The Herald each Sunday. He can be reached by sending e-mail to otisrep@aol.com.

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