by Keith Weiner
Gold Seek
Suppose you wanted to run an enterprise the right way (we know, we know, this is pretty far-out fiction, but bear with us). And, your enterprise has a $1 million dollar piece of equipment that wears out after 10 years. You must set aside $100,000 a year, so that you have $1 million at the end of 10 years when the equipment needs replacing. There’s a word, now archaic, to describe the account in which you set aside this money. From Wikipedia:
“A sinking fund is a fund established by an economic entity by setting aside revenue over a period of time to fund a future capital expense, or repayment of a long-term debt.”
Whether you borrowed the money to buy the equipment or whether you had equity capital to pay for it, the principle is the same. Unless your business is sinking, i.e. consuming its capital, you must replace your assets when they wear out. You must set aside a sinking fund.