A3 Physical Resources
Physical resources in business are physical items like machines, equipment, buildings, and stock. They are essential for making products and providing services. Companies must think about quality, cost, and suppliers when buying these resources to stay efficient and profitable.
Some key decisions around physical resources include;
Renting or buying property
Leasing or buying non-current assets
Procurement practices, e.g. just-in-time
Benefits and Drawbacks of Renting Property
Benefits of Renting
Flexibility: Renting helps businesses quickly adjust to changes, allowing them to move or downsize easily without being tied down by long-term contracts.
Lower Upfront Costs: Renting needs less money upfront than buying, as you don't pay large deposits or additional costs like stamp duty and solicitor fees.
Maintenance Responsibilities: Landlords typically take care of maintenance and repairs, allowing businesses to save time and focus on their operations instead.
Greater Choice of Properties: Renting offers more choices, so businesses can meet their present needs without being tied down long-term.
Drawbacks of Renting
Lack of Control: Tenants need landlord approval on customisations to the property, which restricts their ability to adapt to the space.
No Equity Building: Rent payments don't build ownership, so businesses don’t benefit from increases in property value over time.
Rising Costs: Rental prices can rise unexpectedly, making it difficult to budget.
Dependency on Landlord: Businesses depend on landlords for property management, which can cause problems if the landlord is unresponsive or chooses to sell the property.
Benefits and Drawbacks of Buying Property
Benefits of Buying Business Premises
More Control: When a business owns its property, it can control and modify the space as needed, adapting it to its specific needs and branding.
Additional Income Stream: When a business owns its property, it can profit by selling it if its value increases and can rent it out for extra income at times when they are not using it.
Lower Long-Term Costs: Monthly mortgage payments generally stay fairly fixed over time whereas rents continue to rise.
Stability: Owning property gives your business stability and a permanent base, plus it can be listed as an asset to help raise capital.
Drawbacks of Buying Business Premises
High Upfront Costs: Buying property requires a large deposit, usually around 40% of the price, plus significant upfront costs like stamp duty and legal fees.
Long-Term Commitment: Buying property ties up capital that could be invested in the business, and selling it later can be complicated and time-consuming.
Ongoing Costs: Owning property means you're responsible for repairs, maintenance, business rates, and insurance.
Ongoing Risks Property values can drop, leading to negative equity, and mortgage payments may rise due to rises in interest rates.
Leasing Non-Current Assets
Benefits of Leasing
Lower Upfront Costs: Leasing usually needs little or no upfront payment, helping businesses save cash and use funds for other important expenses.
Flexibility and Upgradability: Leasing allows easy upgrades to newer technology, helping businesses stay current and adapt to changes without the hassle of selling old equipment.
Maintenance and Support: Many lease agreements cover maintenance and support, lowering repair costs for the lessee and keeping the equipment in good condition.
Drawbacks of Leasing
Higher Long-Term Costs: Over time, total lease payments can be higher than buying the asset outright, making leasing possibly more costly in the long run.
Lack of Ownership: Leasing means businesses don't build equity in the asset. After the lease ends, they own nothing, which can be a disadvantage for long-term investors.
Limited Customisation: Since leased assets aren't owned by the lessee, there may be limits on how much they can customise or change them for specific needs.
Buying Non-Current Assets
Benefits of Buying
Ownership and Equity: Buying non-current assets gives businesses full ownership, helping them build equity. This stability can attract investors and secure loans more easily.
Long-Term Cost Savings: Buying assets costs more upfront but saves money long-term by avoiding lease payments. For assets with long lifespans, total ownership costs can be lower than leasing.
Customization and Control: Owning assets lets businesses customize them for their needs without lease restrictions, improving productivity and operational efficiency.
Potential for Appreciation: Some non-current assets, like real estate or valuable equipment, can increase in value over time, offering potential profits when sold and boosting a company's finances.
Drawbacks of Buying
Higher Upfront Costs: Buying non-current assets usually needs a large upfront investment, which can put financial pressure on small businesses or startups.
Depreciation and Obsolescence: Non-current assets lose value over time due to depreciation. Market changes or new technology can also make some assets outdated, resulting in financial losses.
Maintenance Responsibilities: Owners must cover all maintenance and repair costs for assets. These ongoing expenses can add up and affect cash flow, especially with high upkeep needs.
Long-Term Commitment: Buying an asset is a long-term commitment that may not fit changing business needs or markets. If conditions change, selling the asset may be difficult or lead to losses.
Just-in-Time
Reduced Inventory Costs: JIT reduces the need to hold large amounts of stock, which can significantly lower costs related to storage, handling, damage and obsolescence.
Increased Efficiency: By delivering materials only when needed, JIT reduces waste and lead times, which boosts overall efficiency and productivity.
Improved Quality Control: JIT emphasises quality as businesses can't afford defects when they have low stock levels, leading to better products and fewer customer complaints.
Flexibility: As there are low levels of stock being held, JIT lets businesses adjust production to match customer demand, increasing or decreasing output as required.
Risk of Supply Chain Disruptions: JIT relies on prompt supplier deliveries with delays or disruptions stopping or delaying production.
Increased Complexity: JIT implementation is complex, needing accurate forecasting and coordination among supply chain partners, making it difficult to manage effectively.
Higher Reliance on Suppliers: JIT requires strong supplier relationships, as any supply chain issues can greatly disrupt operations.
Limited Buffer Stock: With low inventory, companies may struggle to handle sudden demand increases, leading to lost sales and unhappy customers.