A comparison of capital budgeting versus financing

Opportunity Costs

The risk of funding the project through the traditional capital allocation process is simply the energy cost inherent in the typical delays that plague the capital allocation process. That cost of inaction must be balanced against potentially additional capital costs for having the partner with what is likely a higher cost of capital provide financing and then addressing those costs through either a lease structure or an “as a service” expense model.

Your business is paying an opportunity cost by delaying the upgrade of its existing lighting. If you use the traditional capital budgeting process, then the implementation of a less expensive system will take time. While the decision process might result in a demonstrable reduced first day cost, in our experience that cost reduction is never compared to either the costs of delay (excess energy costs) or the risks of mistaken selections that are now incorporated into the new LED lighting system that has gone through the traditional capital allocation processes. Furthermore, the potential value of the balance sheet improvements through non-traditional methods of attaining the end result are also never considered.

Opportunity Cost

Another risk to your business is that there is not only a delay in the lighting retrofit that will pay for itself in energy savings, but that the lighting project is simply not implemented because the traditional capital allocation process favors a new piece of capital equipment that will generate revenue over a change in existing lighting that will reduce operating costs. Using a financing vehicle can avoid these sorts of misaligned comparisons. Savings are rarely ranked as highly as new revenue, but dollars are dollars and the savings flow straight to the owner’s bottom line in avoided expense.

Through a financing vehicle your company cedes that responsibility to others and is thus able to implement the projects faster. Full-service providers can detail multiple methods for financing projects. Financing will decrease the friction point of the project implementation, but you must weigh the pros and cons of each approach. Depending on your balance sheet requirements, it may be cheaper to use one form of financing versus others. The “as a service” model tends to present cost accounting advantages that can provide the most financial flexibility but also means using a company with a higher cost of capital. Your business must decide from its deeper understanding of its financing and the demands on its capital whether that flexibility is worth some additional ultimate cost.

All that said, overall if your business has the capital to fund the projects and can move quickly to avoid the energy costs inherent in the delays that come with using the traditional capital allocation process, then the projects will both avoid the additional energy costs and the additional cost of borrowing the capital either through either a leasing or as a service model.