Purchasing is often asked to make a fixed requirement cheaper. Someone decides what they want, a specification is written, suppliers are compared on price, quality and delivery, and perhaps some environmental criteria are added. By then, the most important question has already been skipped: does the business need to buy anything at all?
Many purchases answer a need that could be avoided, shared or met by repairing or upgrading something the business already owns. And when a purchase is genuinely needed, the purchase price is only the start. Buying an asset commits the business to years of running costs, maintenance, skills, support and eventually disposal. A machine can be cheaper to buy and more expensive to own. A system can fit the capital budget and create years of costs that sit in other budgets.
This article sets out a practical order of questions before buying, explains the difference between capital and operating spending and why it can distort decisions, and shows how to compare options on their whole-life cash flows rather than their price tags.
Start with the need, not the specification
Teaching material on sustainable procurement suggests an order of questions that applies just as well to cost:
- Avoid: can the need be removed by changing a process, schedule or design?
- Share: can existing equipment, space or capacity elsewhere in the business meet it?
- Extend: can an existing asset be repaired, refurbished or upgraded?
- Reuse: can a second-hand or reconditioned item do the job?
- Redesign the demand: can the requirement be reduced, simplified or combined with another?
- Buy: if a purchase is still needed, which option gives the best whole-life value?
- Manage the life: how will the item be maintained, used well and eventually reused, recycled or disposed of?
The order matters. A business can compare suppliers perfectly and still buy something it did not need.
Demand is often inherited
Many purchase requests reflect the way work is currently organised rather than a genuine shortage:
- Another vehicle is requested because bookings are inconvenient, not because vehicles are fully used.
- Another machine is requested because scheduling is poor, not because capacity is exhausted.
- New computers are requested because old ones are slow, when an upgrade or clean-up would restore performance.
- Disposable packaging is bought because the delivery system was designed around it.
In each case, the purchasing decision can either accept the requirement or expose the system that produced it. This is not about obstructing operations. It is about treating significant demand as an assumption to test.
Test the need with simple data
A few days or weeks of simple records often settle whether a need is real. Useful evidence includes how many hours an item is actually used, when demand peaks, how often people wait for it, how often it breaks down and what it is used for. A large gap between peak and average use usually points to a timing or scheduling problem rather than a shortage. Low average use with frequent waiting points to clustering of demand. Frequent breakdowns point to repair or maintenance rather than replacement. A sign-out sheet, a whiteboard tally or data from the equipment itself is usually enough.
Second-hand and refurbished options
Second-hand or refurbished equipment can meet a need at a fraction of the new price and keep useful equipment in service. It also carries its own risks. Inspect it, or have it inspected, before buying. Ask about service history, remaining life of key components, availability of spare parts and whether any warranty is offered. Check that it meets current Australian safety and electrical requirements for your use, and budget for any refurbishment, guarding or compliance work it needs. A cheaper purchase that needs extensive work, or that cannot be supported, may cost more over its life than a new one.
Capital and operating spending
Accountants distinguish capital expenditure (capex), spending on assets used beyond the current period, such as equipment, vehicles and buildings, from operating expenditure (opex), the day-to-day costs of running the business, such as wages, energy, consumables, maintenance and subscriptions.
The distinction is useful for accounting and budgeting, but it can distort decisions. Capital purchases are visible, concentrated and formally approved, so they receive scrutiny. Operating costs arrive gradually through maintenance contracts, energy, consumables, licences, insurance, calibration, spare parts and staff time, spread across budgets. The decision to buy happens once. The costs it creates continue for years, often in someone else’s budget.
Five cash-flow zones
A whole-life view of an asset covers five zones:
- Acquisition: purchase price, design, procurement and financing costs.
- Implementation: installation, commissioning, integration, training and disruption during changeover.
- Operation: labour, energy, water, consumables, licences, maintenance, inspection and support.
- Change and renewal: upgrades, refurbishment, major component replacement and changes needed for new regulations.
- End of life: removal, disposal, remediation, and any resale or residual value.
An asset creates a stream of cash flows, not just a purchase transaction.
Depreciation is not cash
Depreciation spreads the cost of an asset over its useful life in the accounts. It does not reflect when cash actually leaves the business. For investment decisions, look at the timing of real cash flows: the purchase payment, the running costs each year and any resale value at the end. Your accountant can help translate between the accounting view and the cash view, and advise on tax treatment, which changes from time to time.
Give every business case an operating owner
The person proposing a purchase is often not the person who will live with it. A project or engineering lead may champion new equipment, while the production, maintenance or office team inherits its running costs, skills requirements and quirks. Before approving a significant purchase, ask the future operating owner to confirm the assumptions about maintenance, staffing, energy, support and skills. Their involvement often changes the specification for the better.
Whole-life cost and whole-life value
Comparing whole-life cost is a big improvement on comparing purchase prices. But the cheapest whole-life option is not always the best. A more expensive option may offer flexibility, lower risk, better reliability or a longer useful life. Consider whole-life value: what each option enables, not just what it costs.
When options have different lives, comparing total costs can mislead. One way to compare fairly is to convert each option’s whole-life cost into an equal annual amount, sometimes called the equivalent annual cost, ideally taking account of the time value of money. The article on cost-benefit analysis for business decisions explains discounting and related methods.
Leasing does not remove the commitment
Leasing, renting or financing an asset changes the timing of payments and the accounting treatment, but not the underlying commitment to use, maintain and pay for it. Compare options on the total cash commitment and flexibility, and ask your accountant about the accounting and tax implications.
Circular options still need evidence
Repair, reuse, refurbished equipment, take-back schemes and service-based arrangements can preserve value for longer. But circular options are not automatically better. Reusable items may need cleaning, transport and return logistics. Some recovery processes use a lot of energy. Ask for evidence that the option performs well across its whole life, rather than assuming it does.
Match supplier checks to the risk
For a simple, low-risk item, complex supplier assessments add little value. For a critical, hazardous or resource-intensive purchase, a supplier’s capabilities, support, environmental practices and reliability can create significant exposure. Ask which outcomes matter, which supplier behaviours influence them, what evidence is credible, what belongs in the contract and what should be monitored after purchase.
A seven-stage purchase test
| Stage | Question |
|---|---|
| Need | What outcome are we trying to achieve? |
| Avoid | Can the need be removed through a process or design change? |
| Share | Can existing capacity meet it? |
| Extend | Can an existing asset be repaired, upgraded or refurbished? |
| Lifecycle | What costs and effects arise during use and at end of life? |
| Supplier | Which supplier capabilities matter for the outcome? |
| Recovery | What happens to the item and its materials after use? |
A purchase does not need to pass through every stage. The aim is to stop as early as the need can be met well.
A worked example
This is an illustration. The production supervisor at a small engineering workshop requests a second forklift, because the existing one is often unavailable when needed. A new forklift would cost about $48,000, plus about $3,200 a year in servicing, about $2,400 a year in energy and about $1,500 in training. The owner expects to keep it for eight years, with a resale value of about $12,000 at the end.
Before approving it, the owner asks for a week of records. They show the forklift is in use about 35% of shift hours, but almost everyone needs it between 7 and 9 am and between 2 and 3 pm, when deliveries arrive. Much of its use is moving pallets short distances that a pallet jack could handle. Lifts are also slow because of a hydraulic fault.
The alternatives are to ask the two main suppliers for staggered delivery windows (no cost), buy two pallet jacks (about $3,600), repair the hydraulics (about $2,800) and allow about $200 a year for pallet jack upkeep.
| Whole-life cost over eight years (illustrative, not discounted) | Second forklift | Alternatives |
|---|---|---|
| Purchase and repairs | $48,000 | $6,400 |
| Training | $1,500 | — |
| Servicing and energy, or upkeep | $44,800 | $1,600 |
| Less resale value | –$12,000 | — |
| Total | $82,300 | $8,000 |
The alternatives solve the availability problem for about a tenth of the cost of a second forklift, with less floor congestion and less energy use. The owner sets a trigger to revisit the decision if delivery volumes grow by more than about a quarter.
How this applies to a small Australian business
Small businesses make many purchases with limited time to analyse them. A short discipline helps:
- Ask for evidence of the need, such as usage records, before significant purchases.
- Work through avoid, share, extend and reuse before buying new.
- Estimate the five cash-flow zones for significant assets.
- Involve the operating owner in the decision.
- Compare options on whole-life cost and value, not purchase price.
- Ask your accountant about depreciation, tax treatment and leasing, which can change.
- Ask suppliers about repairability, spare parts and take-back.
- Keep records of actual running costs to improve future decisions.
The articles on buying for the whole life of equipment and depreciation, capital spending and the weight of heavy assets cover related ideas.
Signals worth watching
- Purchases requested without evidence of usage or need.
- Assets replaced without considering repair or upgrade.
- Purchase price dominating decisions on long-lived assets.
- Capital projects creating unbudgeted running costs.
- Maintenance capability considered only after purchase.
- Suppliers becoming critical without anyone deciding they should.
- Assets used far less than their business cases assumed.
Common mistakes
- Starting with the specification instead of the need.
- Comparing purchase prices for assets with large running costs.
- Treating running costs as someone else’s problem.
- Confusing depreciation with cash flow.
- Assuming leasing removes the commitment.
- Assuming circular options are always better without evidence.
Frequently asked questions
Does every purchase need this analysis? No. Use judgement. Low-value, routine purchases need little analysis. Significant, long-lived or high-running-cost purchases deserve the full set of questions.
How do we estimate running costs for new equipment? Ask suppliers for energy, servicing and consumable figures, ask other users, and check your own records for similar equipment. Treat supplier figures as a starting point, not a guarantee.
How do we avoid frustrating staff who request purchases? Explain the questions in advance, make the evidence easy to gather and respond quickly. When a request is declined in favour of a cheaper alternative, make sure the underlying problem is genuinely solved, or trust in the process will fade.
What if the team insists the purchase is urgent? Ask what happens if the decision waits two weeks while usage is measured. If the answer is a genuine safety or customer risk, act. Otherwise, a short delay often reveals a cheaper solution.
Questions to ask
- What outcome do we need, and could we meet it without buying anything?
- Could existing equipment be shared, repaired or upgraded?
- What will this asset cost to run, maintain and dispose of over its life?
- Who will live with this purchase, and have they confirmed the assumptions?
- Are we comparing whole-life cost and value, or purchase price?
- What evidence supports any circular or reusable option?
Bringing it together
The best purchasing decisions start with a better first question. Not “which supplier should we buy from?” but “what is the least resource-intensive, highest-value way to achieve the outcome?” Sometimes the answer is a new purchase. Often it is a schedule change, a shared resource, a repair or an upgrade. When buying is right, judge the commitment across its whole life: acquisition, implementation, operation, renewal and end of life, with the operating owner involved and cash flows rather than accounting labels in view.
Source: KEVOS notes, drawing on sustainable procurement teaching material and general principles of capital and operating expenditure. Examples and figures in this article are illustrations. This article is general information, not financial or tax advice.
