Wouldn’t we all like our time to be worth $50,000+ per hour? Let me share one example of where one hour of effective financial management was worth more than that to a company.
The Seemingly Harmless Scenario
This company needed $50,000 of communications equipment and for cash flow purposes decided to use a lease to finance the equipment. The owner had used financing leases many times in the past and was comfortable with this type of financing. The monthly payment came to $1,521 per month, equating to an implicit interest rate of 6%, which seemed reasonable. He signed the lease, authorized accounts payable to make this payment as a monthly recurring payment, and went on to other more pressing matters.
Fast Forward 3 ½ Years
During a normal financial review I came across this monthly lease payment and looked into the details. Upon review, it was apparent that payments on this “financing” lease should have ended. Upon investigation I discovered that this “financing” lease was an operating lease, with some barbs. Not only did the company not own the equipment at the end of 36 months, as was originally assumed, but unless the leasing company was notified in writing at the end of the lease period, the lease automatically renewed for a 12 month period. At the end of each subsequent 12 month period, it would again automatically renew for an additional 12 months.
The cost of this “little” oversight at the lease origination resulted in one full year’s extra lease payments totaling $18,252. Because this payment had been authorized as an automatic recurring payment, the likelihood is that the details would not have been reviewed until the equipment needed to be replaced in another 3-4 years, which would have resulted in additional excess charges of $54,756 (3 years), totaling a cost of $73,008 for a “little” oversight on a lease agreement.
This is a perfect example of how the value of financial management consulting can’t be easily seen from the outset. In this situation, reviewing the company leases wasn’t part of our original goals, but the process of the review brought the situation to light. If in the beginning we would have focused on the cost of the consulting, we could have easily missed the value that it could bring.