Introduction
Leasing is associated with transferring the right to use assets for a specified period of time in exchange for regular payments. There are two main types of leases that should be discussed: operating and capital leases. In this paper, it is necessary to describe two variants of leases along with their specific advantages and disadvantages and focus on the importance of operating leases to managers.
Discussion
A capital or financial lease is a long-term agreement that is similar to a loan. The lessee is responsible for providing regular payments for the duration of the lease, and at the contract end, the asset is usually transferred to the lessee. This lease is ideal for businesses that use assets for an extended period of time or that want to commit to ownership of assets. On the contrary, an operating lease is typically a short-term agreement allowing the lessee to use assets for a specified period of time. The ownership of the asset remains with the lessor, and the lessee makes regular payments (Hillier et al., 2021). This type of lease has a cancellation option, and it is ideal for businesses using assets for a limited period of time.
Leases are beneficial to managers for conducting effective financial planning as they allow using assets without committing to ownership, which can be a cost-effective way to acquire the necessary equipment. Thus, leases provide much flexibility, since the terms of the lease can be effectively tailored to organizations’ needs (Hillier et al., 2021). Additionally, leases can be used to support large purchases, since the payments can be spread out over time.
Conclusion
When selecting a lease option, one should consider the advantages and disadvantages of each option. It is appropriate to choose an operating lease as it can be a cost-effective way to acquire assets, but the lessee does not gain ownership of the asset. This lease is associated with flexibility for businesses in terms of the option to return the asset at the end of the lease period. Additionally, it allows the manager to avoid the cost of ownership and large capital investment. However, the disadvantage is that it can be more costly from a long-term perspective due to the higher monthly payments, and the lessee will not be able to own the asset. To conclude, when selecting a lease option, it is essential to consider leases’ advantages and disadvantages and focus on businesses’ financial goals.
Reference
Hillier, D., Clacher, I., Ross, S., Westerfield, R., & Jordan, B. (2021). Fundamentals of corporate finance (4th ed.). McGraw Hill.