Designing innovative systems is only half the battle in the automation world. The other half? Figuring out how to pay for it. In a recent episode of The Automation Insider, host Joe McGrath sat down with finance expert Drew Lein to discuss financing strategies for automation.
Why Finance Matters in Automation
Every automation project, like any business investment, must deliver a return. While engineers focus on designing solutions that improve efficiency and productivity, businesses need financial justification to move forward. Without a solid financial case, even the most cutting-edge automation solutions may never see implementation.
According to Drew, the key to making a successful case for automation is understanding the financial foundation of the project. This includes ensuring access to clean and reliable data, involving finance early in the process, and using financial models to quantify benefits.
Establishing a Financial Foundation
Before evaluating an automation project, companies must ensure they have reliable data. While tools like Excel and ERP systems offer some analytics, deeper insights often require reaching into source data. If high-quality data isn’t available, businesses should simplify their models and use basic economic principles to estimate costs and returns.
Bringing finance into the discussion early can make a significant difference. Finance teams help frame opportunities, conduct due diligence, and provide credibility when making investment decisions.
Building a Financial Model for Automation
Once a company has a strong financial foundation, they can begin modeling automation investments. The first step is establishing a baseline- understanding current costs, inefficiencies, and revenue drivers. From there, businesses can create projections based on different automation scenarios.
Key elements of a financial model include:
- Fixed and variable costs: Understanding labor expenses, energy consumption, and operational inefficiencies.
- Revenue impact: Assessing how automation increases capacity and throughput.
- Scenario modeling: Comparing different investment levels and their projected returns.
- Stress testing: Running models through best- and worst-case scenarios to gauge potential risks.
Advanced tools can help refine these projections, allowing businesses to account for variability and uncertainty.
Evaluating Automation Investments
Automation projects vary in size and complexity, requiring different levels of financial evaluation. Drew suggests a three-tiered approach:
- Basic Payback Analysis – Calculating how long it takes to recover the initial investment.
- Discounted Cash Flow (DCF) Analysis – Accounting for the time value of money to assess long-term financial impact.
- Advanced Cost Modeling – Factoring in sustainability, labor trends, and energy costs to provide a more holistic view.
Ownership structure also plays a role in investment decisions. Startups, for example, may prioritize long-term growth, while family-run businesses might focus on cash flow and EBITDA (earnings before interest, taxes, depreciation, and amortization).
Financing Options: Buy vs. Lease
One common question when getting started with financing strategies for automation, is whether to buy or lease equipment. Financing models like Robotics-as-a-Service (RaaS) or Software-as-a-Service (SaaS) offer alternatives to large upfront capital expenditures. However, rising interest rates have increased the cost of capital, making financial scrutiny even more critical.
Leasing can provide flexibility, allowing companies to adopt new technologies without a significant upfront investment. It also shifts maintenance and upgrade responsibilities to the service provider, reducing the risk of obsolescence. However, leasing often comes with higher long-term costs, as payments accumulate over time.
Buying, on the other hand, offers ownership advantages, such as potential tax benefits, asset depreciation, and the ability to customize solutions to fit specific operational needs. While the initial capital outlay is substantial, ownership can lead to lower overall costs in the long run, particularly for businesses with stable, long-term automation needs.
Companies must also consider maintenance costs, working capital, and financing structure, whether through debt or equity, to ensure long-term profitability. Additionally, factors such as the expected lifespan of the equipment, potential resale value, and evolving industry regulations should be incorporated into the decision-making process. Conducting a thorough cost-benefit analysis, including considerations for return on investment (ROI) and total cost of ownership (TCO), will help businesses determine the best approach for their specific circumstances.
The Future of Financing Strategies for Automation
The automation industry is shifting towards modular, scalable solutions, allowing businesses to invest incrementally. This approach aligns capital expenditures with demand growth, reducing financial risk.
Ultimately, successful automation investments require collaboration between engineering and finance. By integrating financial analysis into the automation decision-making process, companies can maximize returns and make informed, strategic choices.
Interested in learning more about financing strategies for automation, and getting started in your facility? Reach out to our team of experts here at Hy-Tek Intralogistics.
