Some years ago Dun & Bradstreet conducted a study that revealed that the average company earns 12% on every dollar of working capital that retains in the business. Over the years this percentage will fluctuate due to economic conditions but, for these purpose, the 12% will be assumed. Cash, obviously is a component of working capital. As to the extent we deplete cash, to that same extent we reduce working capital and liquidity ratios. This results in lost earnings, lost opportunities in terms of investments, and often, reduced credit ratings. These factors must be considered.

1. You wish to purchase a piece of equipment for $30,000. If that money were retained in the business what would it be worth after 36 months? According to the D&B study, if you used the 12% earnings rate compounded monthly, the value would be $42,923. That's the amount of your lost earnings or investments opportunity. Yes, leasing has costs but let our broker prove to you that leasing is generally the more prudent financing alternative.

2. Net income after taxes as a percent of net working capital is a worthy consideration. The following shows how much a particular company's net income dollars are working in relation to its working capital.

NIAT = $50,000

NWC = $300,000

This company is earning 16.7% on its working capital. Why tie up cash, especially in items such as computers and other equipment, which usually has a rapid depreciation rate.

3. Multiply the rental amount by the corporate rate (34% as provided by the Tax Reform Act) to arrive at the "tax savings" through leasing. Then subtract this figure the monthly rental amount to find the monthly cost after tax savings. Assume a $10,000 piece of equipment is leased for 36 months with 10% or FMV purchase option and monthly payment of $365.90:

Monthly Rental Amount $365.90

Tax Savings (365.90 x .34) 124.41

Actual Monthly Cost $241.49