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What are a company’s most valuable long-term assets? They’re not just buildings and patents. Almost all businesses have fixed assets that allow them to operate and serve customers. Without these assets, business comes to a halt. That’s why tracking fixed assets is so important for organizations of all sizes.
In this article, we’ll explain what fixed assets are and why they’re so important. Then we’ll dive into how organizations can effectively track and manage their assets and some of the most common mistakes to avoid.
What is a fixed asset?
In general, the assets of an organization can be classified into two categories: current or non-current. Current assets are those that come and go, including the cash, accounts receivable, and inventory that fluctuates from month to month. Non-current assets include long-term investments, property, and equipment–they’re commonly referred to as fixed assets.
The term “fixed,” however, can be a bit misleading because these assets are not always stationary. In this case, “fixed” means they cannot easily be converted into cash without great expense. Fixed assets are items that a company owns and expects to use in its operations for more than one year. This includes buildings, machinery, computers, vehicles, furniture, and equipment.
A manufacturing company may have machinery, computers, and equipment that it uses to produce goods. A restaurant would have tables and chairs for dining guests as well as a stove, ovens, sinks, dishwashers—all types of fixtures needed in the kitchen area. These are all examples of fixed assets because they will be used over one year or more.
But even information-based businesses and remote teams have assets that need to be tracked. The laptop a programmer codes on? That’s a fixed asset. If it’s physical property that helps your business function, it’s a fixed asset.
Why do fixed assets matter?
Assets like property, plant equipment, furniture, and fixtures are critical to staying open and profitable; they provide the basic infrastructure or foundation on which organizations build their businesses.
The value of an organization’s fixed assets can be considered part of its total assets, which is a measure of the company’s overall size and financial strength. For example, if you have $100 million in current assets and $50 million in non-current (fixed) assets, your total asset base would be $150 million.
Asset and financial health are important for businesses, but tracking fixed assets is also necessary for schools, government agencies, and other organizations. Whatever your industry, physical assets allow businesses and other organizations to create value. From office equipment to furniture to heavy machinery, fixed assets are investments. Tracking assets helps you get more out of those investments.
Why should organizations track their fixed assets?
Organizations need accurate records to effectively manage them so they’re cost-effective and used for the right purposes. Asset tracking enables us to make good decisions about whether an asset needs replacement or modernization, or if we are using it for the right purposes.
When you have an up-to-date understanding of your fixed assets and their value, you can make better plans and business decisions:
- You will know which items need preventative maintenance or replacement (e.g., old computers, long-outdated software).
- You will be able to gauge the condition of assets and plan for when they will wear out or need repair.
- With accurate data about your fixed assets in hand, you can more confidently make decisions about purchasing new equipment and budgeting.
This enables effective management, which will lead to cost-savings and better decision-making about how best to use our long-term assets. In addition, accurate record-keeping allows us to benefit from tax advantages that are available only when we track those costs.
As your organization grows in size and complexity, the need for accurate tracking will grow as well. Managing a growing inventory of fixed assets can be difficult and expensive, but an accurate tracking system will help managers plan better by knowing what their fixed assets are worth and how much depreciation they should expect to incur over time.
Tracking fixed assets is also the simplest and best way to avoid property loss and theft. When you know where something is supposed to be, you can quickly know when it’s missing and possibly who had it last. Whether an asset is stolen or simply misplaced, a tracking record makes it easier to recover.
How should organizations track their fixed assets?
Organizations should keep good records of the acquisition, use and eventual disposal of any asset it owns so that financial statements are accurate and useful for decision-making purposes. This includes recording cost information such as purchase price or accumulated depreciation; where the asset is located; the asset’s current value, and how it will be disposed of.
In order to be most effective, management of fixed assets must start with an up-to-date inventory of what you own at your business location(s). To keep this list current, it needs to be updated regularly to properly account for any items being used in the company’s operations.
Tracking fixed assets vs. tracking inventory
Because they both involve counting and tracking items for a business, the terms “tracking fixed assets” and “tracking inventory” are occasionally interchanged. The important distinction between the two is that inventory is meant to be sold and offloaded from the business. On the other hand, the business uses fixed assets regularly.
Inventory is temporary, but fixed assets are long-term investments. For instance, a clothing manufacturer’s shirts and dresses are inventory intended to be sold. However, the sewing machines they use to produce the clothes are fixed assets.
Calculating and tracking depreciation
Depreciation is one of the most important financial reasons businesses track their physical assets. Depreciation refers to the value that a fixed asset loses over time. The IRS allows you to deduct this lost value when calculating your taxes.
To track and write off depreciation, you must document your assets' worth and keep accurate records of how much their worth reduces over time. Businesses often use depreciation schedules to plan how assets will decrease in value. This is a document that charts the object's value over time.
If you're unfamiliar with depreciation, think about how the value of a car reduces over time. Generally, a brand new car is at the height of its value. A five-year-old car will be worth less, and a ten-year-old car less than that. The same principle applies to your fixed assets.
Asset tracking vs. asset management
"Asset tracking" and "asset management" are often used interchangeably. While the two are closely linked, there is a subtle difference.
Asset tracking refers to tagging or labeling assets, scanning them, and keeping track of where they are. Businesses often also track the asset's value, condition, and depreciation.
Asset management includes asset tracking and encompasses how an organization maintains, replaces, distributes, and collects its assets. Asset tracking is an important component of the larger responsibility of asset management.
Tips for managing your company’s fixed assets effectively
Each organization’s asset tracking system will be slightly different, but here are some tips that any business can benefit from.
- An accurate tracking system will help managers plan better by knowing what their fixed assets are worth and how much depreciation they should expect to incur overtime.
- Be mindful of the difference between what you own and what you lease. The former are called “owned” or “capitalized” items while leased items form a part of an organization’s expense. Fixed assets should be owned in order to use them efficiently but leased assets should be recorded as an expense.
- Keep separate records of fixed assets that are leased for use by the company and those used solely in other businesses (as this is a contribution to equity).
- Track asset depreciation both right away when it happens, and also on an annual basis so you can see how much has been written off and adjust the records accordingly.
- Keep good, accurate, and up-to-date records so you can make better decisions about your assets; this will also help you track costs for tax purposes.
Common mistakes when tracking fixed assets
Along with the above tips, keep in mind these common mistakes. In most cases, creating a clear process and training your team will prevent a lot of headaches.
- Failing to keep separate asset management books (one for owned assets, and one for leased)
- Not tracking the depreciation of each asset over time as it is used.
- Failing to record information such as purchase price or accumulated asset depreciation; where the asset currently is located; current value and disposal plans– which will lead to inaccurate financial statements.
- Allocating costs into the wrong asset account, which will lead to incorrect financial statements.
Tracking fixed assets in asset management software
You will need more than just a spreadsheet to track fixed assets effectively. Asset tracking software is how modern businesses manage their property and make smart business decisions.
Asset management software works with the asset labels you tag property with and the scanners you use to read those asset tags. The software serves as a database with records for each fixed asset. This may include the date of purchase, condition, repairs, or a history of use. In RedBeam, you can use custom fields to monitor what matters to your business.
Typically, when you scan an asset label, that is noted in the asset tracking software. This gives you an accurate timeline of when and where the item has been used. Asset management solutions like RedBeam allow you to analyze that data with custom reports. This helps businesses understand the average life of an asset and when maintenance and replacement should be expected.
Asset tracking software can also provide practical information, like at which location a certain piece of equipment is being stored or when it was last used and by whom.
Next steps
It is important to track fixed assets so they can be managed and used wisely. If this blog post has given you ideas for taking care of your company’s fixed assets, you may be interested in reading more on the subject.
Here’s a link to our comprehensive asset tracking guide for busy professionals.
