Give your software a new lease on life

The most successful clients I have are the ones investing in new technology.

Some have upgraded to a multiaxis CNC lathe because their work needs to be both turned and milled and by adding new machinery they can increase both capacity and efficiency. Other clients have purchased a 5-axis machining centre because the setup time for machining a part on a 3-axis machine was killing their profitability and preventing them from quoting competitively.

Investing in new machine technology is just the first step -- granted it is the largest one -- but still the first step in improving both efficiency and profitability.

Re-examine Software Needs

Having the newest machine tools on your floor is great, but if systems are not in place to support them, then the gain could be compromised.

The best example I have come across recently occurred when a client installed a new machine but continued to use 10-year-old software. I asked a software provider about this issue and he put it best when he said, “There are three main areas that affect a manufacturer’s efficiency: the machine, the tooling, and the software. Your ability to be productive will only be as strong as the weakest link.”

We then talked about a few mutual customers of ours who had recently upgraded and leased new CAD/CAM software. A Tier 3 aerospace machine shop had just purchased a new 5-axis machining centre but had not upgraded its software system in years.

The new machine improved the cycle time but not as dramatically as they had anticipated. It was not until a new software platform was implemented, at a cost of roughly $12,000, that the benefits of the new equipment were fully realized. After install, the cycle time for a part that had been 2.5 hours was reduced to 25 minutes.

Another machine shop, this one working in the telecom industry, also had recently installed a 5-axis machine.

It was doing a few different part generations, which were taking eight hours to program, and then had a cycle time of 12 hours. The company’s investment in new CAD software was approximately $30,000 and the result was a reduction in programming time to only three hours with an eventual cycle time of five hours.

The savings for this shop were so dramatic that the ROI for the machine, which was originally pegged at 24 months, became less than one year.

Leasing Software

Many manufacturers that are very familiar with leasing machines do not realize that arranging financing for software can be done just as easily.

However, securing financing for software isn’t handled exactly like lending against a hard asset because, in the event of a default, there is nothing to repossess and resell.

Because the typical transaction for software is under $50,000, and in many cases significantly smaller, if the business is well-established and has some history of borrowing, then the financing application is pretty simple. An approval typically can be processed within one business day.

The reality is a lender with experience in the manufacturing industry understands the cost of the software is relatively insignificant when measured against the increases in productivity and efficiency that will ultimately show up once it has been implemented.

It’s also important to note how the software industry is changing because there could be additional benefits from a taxation perspective.

Normally software, whether it is purchased outright or financed, is owned by the user in perpetuity but requires yearly maintenance for upgrades. This means a large upfront cost with significantly smaller maintenance fees. But the market is changing, and some of the largest software developers are moving toward a subscription model.

This means that even though the pricing has come down, in some cases up to 75 per cent, once the subscription expires, a new one must be purchased or leased.

From an accounting perspective, the preferred method to handle this type of transaction is to set it up as an operating lease, which is a contract that allows for the use of an asset but does not convey rights of ownership of the asset. The leasing company maintains ownership.

The software is not put on the books as an asset, but instead is accounted for as a rental expense in what is known as off balance sheet financing. Operating leases have tax incentives because the payments made over the year are expensed and do not result in assets or liabilities being recorded on the balance sheet.

The yearly cost essentially reduces the businesses operating income and therefore the tax savings come from a reduction of that income.

For Canadian manufacturers to remain competitive on the world stage, investing in new technology is very important. But it is just as important to ensure the new technology is used in the most efficient manner possible. Sometimes it could be a relatively small software investment that makes all the difference.

Ken Hurwitz is senior account manager, Blue Chip Leasing Corp., 416-614-5878, www.bluechipleasing.com.