The Ultimate Guide to Fixed Assets
When it comes to company acquisitions, few are as costly - or as important - as fixed assets. These tangible items, which can include anything from land and buildings to machinery and vehicles, play a huge role in a company's financial stability and ability to generate revenue. That's why it's so important for businesses of all sizes to have a comprehensive understanding of what fixed assets are, how they differ from other types of assets, and the best ways to manage them.
In this guide, we'll explore all of those topics and more, so that you can make the most informed decisions about your business' finances.
What are Fixed Assets?
Fixed assets are property owned by a business that has a physical form and a useful life of greater than one year. The term "fixed" applies because the assets cannot be easily liquidated, or converted into cash. Fixed assets are also known as long-term assets or non-current assets. These assets are classified as fixed because they are not expected to be turned over, or sold, within the accounting period. Rather, they are held for use in the production of income over a number of years. For this reason, businesses must carefully consider which fixed assets to acquire, as they can have a significant impact on the financial health of the company.
At its most basic level, a fixed asset is any physical item that a company uses to generate revenue. This can include land and buildings, manufacturing equipment, vehicles, server racks, office furniture, and more. In contrast to current assets, which are liquid and can be easily converted to cash, fixed assets tend to have a longer lifespan and are much more difficult and expensive to replace. As a result, they often make up a large portion of a company's total assets.
Not all fixed assets are created equal, however. Some, like office furniture and vehicles, depreciate relatively quickly and may need to be replaced every few years. Others, like buildings and manufacturing equipment, can last for decades with proper maintenance. It's important to keep this in mind when developing your fixed asset management strategy, as different types of assets will require different levels of care.
Current Assets vs. Fixed Assets
One of the key decisions any business must make is how to allocate its resources between current assets and fixed assets. Current assets are those that are converted into cash within one year, while fixed assets are those that remain on the balance sheet for longer. The decision of how to allocate resources between current and fixed assets depends on several factors, including the nature of the business, the stage of the business cycle, and the available financing.
For example, businesses that are highly dependent on customer demand may choose to invest more heavily in current assets, such as inventory, to be able to meet customer orders quickly. In contrast, businesses with a longer-term focus may choose to invest more in fixed assets, such as new equipment or property, to generate higher returns over time. Ultimately, the decision of how to allocate resources between current and fixed assets is a critical one that should be carefully considering the specific needs of the business.
The Principles of Fixed Asset Management
Now that we've answered the question "what are fixed assets?," it's time to turn our attention to how they should be managed. Fixed asset management is the process of tracking, maintaining, and upgrading your company's fixed assets in a way that maximizes their value and ROI. This can be a complex undertaking, particularly for businesses with large inventories or multiple locations. However, there are a few key principles that all businesses should keep in mind when managing their fixed assets. Following this list of principles built for scaling allows a roadmap for effective fixed asset management.
The first principle is that preventive maintenance is always cheaper than repair or replacement. This is especially true for high-value assets like buildings and manufacturing equipment, which can be very expensive to repair or replace if they break down. By investing in routine maintenance and repairs, you can extend the lifespan of your assets and avoid the need for more costly interventions down the road.
The second principle is that accurate record-keeping is essential. This includes not only keeping track of each asset's purchase price and depreciation schedule, but also maintaining records of all repairs, maintenance, and upgrades. This information will be invaluable if you ever need to sell or dispose of an asset, and it can also help you keep track of your company's overall fixed asset portfolio.
The third and final principle is that regular monitoring is necessary to identify potential problems early. This can be done in a number of ways, but perhaps the most effective is to conduct regular physical inspections of your assets. This will allow you to identify any damage or wear and tear that may have occurred, so that you can make the necessary repairs before the problem gets worse.
By following these principles, you can develop an effective fixed asset management strategy that will help you keep your assets in good condition and get the most value from them over time.
Why Fixed Asset Management is Important
Using the principles of fixed asset management above, we can get a better picture of the processes to follow when improving our asset tracking strategy. Knowing "how" versus "why" are very different when it comes to the true value proposition of asset tracking solutions. There are many reasons why each team should vouch for the technology to be used in their organization, but you can see the most prominent or impactful listed below.
Centralized information is important for fixed asset management because it allows businesses to keep track of their assets and where they are located. This is especially important for businesses with multiple locations, as it can be difficult to keep track of all of the assets without a central database. Additionally, fixed asset management can help businesses to insure their assets and to plan for their replacement.
By keeping track of the purchase price, depreciation, and current market value of assets, businesses can make sure that they are adequately insured and that they have the funds necessary to replace them if they are lost or damaged. In sum, fixed asset management is an essential part of maintaining a healthy business.
Fixed asset management is important for budget management because it ensures that assets are accounted for and properly valued. This allows for accurate budgeting and forecasting, as well as adequate insurance coverage. Additionally, fixed asset management can help to prevent fraud and theft, as well as minimize losses due to natural disasters.
Furthermore, fixed asset management provides essential information for tax reporting purposes. Therefore, fixed asset management is a critical component of effective budget management.
Federal Audit Compliance
Ensuring audit compliance is a critical part of any company's operations. Regular auditing helps to ensure compliance with federal accounting and business rules, and also allows for closer scrutiny of financial records for suspicious activity or irregularities. This helps to maintain the company's credibility and ensures that audits are carried out effectively.
Scanning asset labels and regularly auditing assets helps to ensure that businesses are using their assets as intended and reduces the risk of financial irregularities. Fixed asset management ensures compliance for businesses of all sizes.
Proactive Maintenance Schedule
Fixed asset management is a critical part of keeping a proactive maintenance schedule. By tracking the location, age, and condition of fixed assets, businesses can ensure that they are taking the necessary steps to protect their investment. Additionally, fixed asset management can help businesses to identify potential problems before they become costly repairs. By keeping a close eye on fixed assets, businesses can avoid unplanned downtime and keep their operations running smoothly.
In short, fixed asset management is an essential tool for any business that wants to keep a proactive approach to maintenance.
Optimize the Asset Use
The importance of asset optimization cannot be overstated. It is imperative that you have a precise plan for managing your assets and using them efficiently. This will lead to increased productivity in all aspects of your organization’s operations. Planning out resource allocation or specified asset use on the fly becomes easier, but a beforehand strategy session will allow your teams to coordinate best possible uses for their shared or individual assets.
Optimizing your assets to optimize efficiency seems redundant, but many don't take this process as far as their technology allows them to. It will help you make better decisions about how best spend each day so that everything runs smoothly from start-to finish!
Fixed assets are a crucial part of any business, and proper management is essential to maximizing their value. By following the principles outlined in this guide, you can develop an effective fixed asset management strategy that will help you keep your assets in good condition and get the most value from them over time.
For more information related to asset management, industry specific tips, or best practice guides oriented around your organization’s asset tracking solutions – consider reading more of our available blogs.