For major corporations, whose leaders have more of a fear of their stock performance than cash flow, help is at hand, although it may mean going into your next capital budget planning cycle to effect a solution.
Most mills with any age on them have a vital piece of equipment--it may be a refiner, a major pump, a breast roll, or something else--that just does not perform up to standards. It constantly needs repair, causes downtime, and is a potential source of injuries (because people are around it more often than should be necessary).
If this item is fully depreciated, or if the amount of book value left is somewhat less than what you have been spending per year to maintain it for the last few years, there is a great solution at hand, if you are able to convince the powers that be. (Show them this column if necessary.)
That solution? Buy a new one whose cost is capitalized. Operationally and maintenance-wise, life will be much better, and the books will show better results, too.
Let's say this errant piece of equipment is causing you $100,000 per year in lost production, maintenance and excessive energy costs (as compared to a new model).
A new one costs $500,000 (TIC) and can be depreciated in 20 years. (I am making that up, as I don't know what the depreciation schedule is).
Further, the old one is on the books with a residual value of $50,000.
Let's talk about the old one first. You are going to eliminate $100,000 in costs the first year by replacing it (see above). Because it has a book value of $50,000, you will have to take a hit on your P & L for this amount the first year. So, first year savings is $100,000 minus $50,000 equaling $50,000.
The new one is going to depreciate over 20 years, or at a rate of $25,000.
At today's interest rates, even if your company is a sad case with a poor credit rating, the $500,000 is going to cost $30,000 per year in interest.
So, in the second year, we saved $100,000 in costs the old unit was incurring, less $25,000 in depreciation, less $30,000 in interest for a total savings of $45,000 per year. Now, you are going to have to pay off that new piece of equipment, but I have $45,000 in free cash flow to retire the debt incurred for this piece of equipment and to send a little to the shareholders in their dividend. Plenty of wiggle room here.
My example is ultra-simplistic, but you get the idea. Even when you bring in tax considerations, which I have not done, it is still a big winner.
And your mill has one less operational and maintenance headache.