Can I afford to buy that truck or piece of equipment?
A new truck, a piece of production equipment, a commercial kitchen build-out. Big purchases feel necessary, but they can also sink a business if the timing is wrong. Here's how to decide using your actual numbers.
The short answer
Can you afford it? You need to pass two tests. First, after the purchase (or after the down payment plus monthly financing), do you still have at least 2 months of operating expenses in cash reserves? Second, will the equipment generate or save enough to cover its cost within a reasonable timeframe?
Equipment purchases are cash flow events, not just expense line items
You found a $38,000 truck. Your accountant will depreciate it over 5 years, so on paper it costs $7,600/year. But your bank account does not care about depreciation schedules. It cares that $38,000 (or $8,000 down plus $680/month) just left the business.
The danger with big purchases is not that they are expensive. It is that they drain cash at a moment when you might need it for something else: a slow month, a late-paying client, an unexpected repair. The truck itself might be a great investment. The question is whether your business can absorb the cash impact right now.
Two tests for any major purchase decision
- The cash impact test. After the purchase (or down payment), will you still have at least 2 months of operating expenses in the bank? If you are financing, add the monthly payment to your fixed costs and confirm your net income still covers total expenses.
- The payback test. Will this equipment generate additional revenue or reduce costs enough to pay for itself within 12-24 months? If the payback period is longer than 24 months, the risk of changing business conditions eroding the return is significant.
How to evaluate an equipment purchase in QuickBooks Online
- 1Get your current cash position
Go to Reports→ “Balance Sheet” as of today. Note Total Bank Accounts under Current Assets.
- 2Find your average monthly operating expenses
Go to Reports→ “Profit and Loss” for the last 3 months. Average the Total Expenses across those months.
- 3Run the cash impact test
Subtract the purchase price (or down payment) from your current cash. Divide the remainder by your average monthly expenses. If the result is less than 2, the purchase would leave you dangerously thin on reserves.
- 4Estimate the payback period
Estimate the additional monthly revenue the equipment will generate (or the monthly costs it will save). Divide the total purchase price by that monthly benefit. That is your payback period in months.
- 5Check timing against your cash flow calendar
Check your Statement of Cash Flows for the last 3 months. Is cash flow from operations consistently positive? Are there big payments coming up (taxes, insurance) that would compound the hit?
Total time: about 20 minutes. Two reports, a subtraction, and an honest estimate of the revenue or savings the equipment will generate.
How to evaluate an equipment purchase in Xero
- 1Check your cash position
Go to Accounting → Reports→ “Balance Sheet.” Find Bank under Current Assets.
- 2Get average monthly expenses from the P&L
Go to Accounting → Reports→ “Profit and Loss” for the last 3 months with monthly columns. Average Total Operating Expenses.
- 3Run both tests
Cash impact: (Current cash - purchase price) / avg monthly expenses. Should be 2 or higher. Payback: purchase price / estimated monthly benefit. Should be 24 months or less.
- 4Use the short-term cash flow tool to see the impact
Go to Business → Short-term cash flow. Add the purchase as an adjustment to see how it affects your projected cash position over the next 30-90 days.
Total time: about 15-20 minutes. Xero's cash flow tool lets you model the purchase impact directly, which is a nice advantage over QuickBooks.
The timing trap with big purchases
- Good deals pressure bad timing. The truck is $8,000 below market. The equipment is on clearance. The urgency of the deal overrides the reality of your cash position.
- Financing hides the true cost. $680/month sounds manageable until you add it to the pile of other monthly obligations you are already carrying.
- Revenue assumptions are optimistic. You plan to generate $4,000/month in new work with the equipment. But ramp-up takes longer than expected and the new revenue does not materialize for 4 months, not 2.
Or model any major purchase against your real numbers
Bottomline connects to your QuickBooks or Xero account and can show you exactly how a major purchase would affect your cash position, runway, and margins:
Bottomline factors in your upcoming obligations, seasonal revenue patterns, and outstanding receivables to show you the full picture. Not just “can you afford it today” but “can you afford it given everything else that is coming in the next 90 days.”