Now, today I would like to highlight some issues about business fixed assets. While some entrepreneurs have mastered the art and science of properly managing their fixed assets, to optimize them and maximize their enterprise gains, others are very clueless and do not even have the basics right. The clueless ones make serious mistakes that could be detrimental to their enterprises. For example, they hold lots of resources in idle assets yet these resources could be used for other more productive business endeavors. They continuously suffer from downtimes and idleness due to poor fixed asset management. They miss significant tax benefits because they have not met the regulatory and statutory requirements to quality for tax advantages arising from owning fixed assets. Some even have their facilities closed due to health and safety issues related to management of fixed assets. I could go on and on.
I don’t want to be drawn into defining fixed assets though I know that some entrepreneurs sitting on big enterprises might feel much challenged if asked to define fixed assets. I’m not joking by the way! This is also worsened by the fact that the purely accounting and academic definition of fixed assets does not help matters with a layman. The academic definition talks about things such as tangible and intangible property, not expected to be consumed or converted into cash within a year, used to generate income, having useful life greater than one accounting period, blah blah blah! Now, you could get someone who can ignorantly argue that even inventory could meet the above criteria. You might not blame him or her because accountants have simply made the definition complex, moreover moving around several issues. I will not be drawn into that. I repeat!
I will simply give examples of fixed assets, such as land, buildings, furniture and equipment, plant and machinery, vehicles, computers etc. You can of course easily relate these to some of the above definition phrases such as ‘used to generate income’, ‘not consumed or converted into cash within a year’ etc. We could complicate it by saying that some buildings would not quality to be fixed assets because they are held for sale. We could even say that converting some fixed assets into cash is as easy as drinking water, and therefore the expectation of not converting into cash does not apply. For entities dealing in computers, stocks of computers are inventory and not fixed assets, though we have used computers as an example of fixed assets. By the way, don’t blame me for my arguments. I’m simply narrating what goes on in the minds of some people when you try to define fixed assets, and they don’t understand it.
Pardon me for drifting, so let me get back to the main issue in my blog of today. The top tips I’m going to give below, are aimed at guiding entrepreneurs to maximize gains from fixed assets in their businesses or enterprises. They ensure that you get the best returns from your fixed assets and use them to improve your enterprise’s profitability and overall operations. They also ensure that you use your fixed assets efficiently and effectively while reducing and minimizing related risks. These tips to maximize your gains from fixed assets also ensure that you operate within the legal and statutory requirements. The tips therefore can add a lot of value to your enterprise, and hence you cannot ignore them, unless you are already applying all of them in your enterprise. Do you understand me?
So, what are these tips that help maximize gains from business fixed assets?
- Asset management strategy. We will start at a strategic level. Generally, asset management strategy is much broader in perspective and goes beyond basic fixed asset management, focusing on overall plan and long-term (10-20 yrs) aspects of the enterprise. It is at a high level and focused on key objectives, dwelling mostly on asset availability and capacity, and is linked to other broader enterprise strategic plans such as financial, risk, environment, human capital etc. It ensures that organizational objectives are converted into asset management objectives and dwells on the approach for developing asset management plans. Now, I don’t intend to complicate things from the start here. What I’m simply saying is that a strategic foundation is vital for you to maximize your gains from fixed assets you invest in, in your enterprise. You could chose to ignore these strategic issues especially if you think you run a very small enterprise, but as you grow your enterprise, you will not be able to avoid this. Ok?
- Value for money considerations such as before-purchase issues, ROI, asset analysis etc. Entrepreneur, you also need to know that maximizing your gains from fixed assets requires focusing on the economics of fixed assets. How do you determine your need for asset acquisition in the first place? Do you carry out investment analysis using approaches such as Net Present Value (NPV), Payback Period (PBP), and Internal Rate of Return (IRR) etc.? Do you understand these approaches to investment analysis, or do you seek advice from your accountant or other experts in this matter at all? Simply put, there has got to be economic sense in your acquisition and use of fixed assets, otherwise your business will be bleeding money in a silent way that you cannot even see and understand. The end result will be disaster. It could make you quit your business or lose it. You could alternatively suffer for decades in the name of making your business work, due to poor decisions on fixed assets. Good tips and decisions ensure that you get the best economic use, maximize efficiency and effectiveness, eliminate idle assets or idle capacity, make extra asset acquisitions based on sound decision such as filling capacity gaps, dispose unnecessary assets and convert the resources into better use etc. Don’t you agree with me? Come on, my dear entrepreneur! If you are the type of entrepreneur who gets easily convinced into buying some old useless assets without doing an economic analysis, don’t blame anybody when your business struggles.
- Utilisation and maintenance. By the by, having good and valuable fixed assets is one thing, and having them productive including getting the most from them is another thing. You can only maximize your gains from fixed assets when you use them efficiently and effectively. You could make the best investment analysis and other before-purchase decisions, and bring in the best fixed assets, but their utilization and maintenance could water down the gains. You have got to balance production and production capacity, to maximize your returns from your assets. You need to understand and use measures to assess your asset utilization. Some simple numbers from your plant economics or even your management accounts can give you some clues on this. The notion that machines don’t get tired is not absolutely correct. They do get tired. Again, don’t be so hopeless an entrepreneur, to the extent that parting with your ‘hard-earned’ money to do routine maintenance is a big war. Ok? You can’t always work a donkey without proper feeding. Good utilization and maintenance ensures minimum downtime or production stoppage due to asset maintenance issues. Make use of operating procedures and other guidelines when using fixed assets. Learn also to dispose of old assets in time. Some entrepreneurs use fixed assets until the scrap buyer will even feel sorry for those poor pieces of metal assembled in the form of machinery! You don’t need to go to that level. Try and keep some sanity in your enterprise.
- Accountability and responsibility for fixed assets. Another important tip to help maximize your gains from your fixed assets is the aspect of accountability and responsibility for fixed assets. My dear entrepreneur, you need to practice fundamentals and also basics such as marking or tagging your assets, auditing them, physical verification, safe custody, asset tracking, depreciation etc. These help avoid misuse and theft, misstatement in the financials etc. Track the location, use, maintenance, custodianship etc. of all your fixed asset items. The objective you are trying to achieve here is asset safety and productivity. You need to control, monitor and properly account for assets throughout the entire life cycle. Physical verification helps compare and reconcile the physical assets with book records or the fixed asset register, check the conditions including use, and even identify idle or ghost assets. You can use IT to manage your assets, as you synchronize your hardware and software. Customize your reporting to enterprise and industry requirements. If you and your enterprise staffs are accountable and responsible for fixed assets, your business will maximize gains from the assets. Do you understand what I’m meaning here?
- Legal, statutory and quality standards implications. I know some of you entrepreneurs don’t like to hear about anything legal, statutory etc. My opinion is that you can’t avoid these, as long as you want to run a serious business. These issues also apply to your fixed assets by the way. Do you know that incorrect and poor documentation of your fixed assets can deny you some tax allowances and tax credits? Do you know that correct ownership details and rights, reliable asset reporting, elections you make regarding fixed assets for tax purposes etc. all have tax implications? Do you appreciate that impairment testing and depreciation issues are important and have various implications? Tax credits and capital allowances related to fixed assets do not come cheap, and you need to be a smart entrepreneur. Country specific legal and statutory requirements regarding fixed assets, including aspects such as insurance of fixed assets, international quality standards etc. all have implications that can help your enterprise maximize its gains from fixed assets. Now, if you want to ignore these, go ahead, but don’t come back to blame your accountant, your auditor, tax consultant, business consultant, the tax collectors etc. Ok?
- Safety and health including environmental issues. The use of various categories of fixed assets has some critical safety, health and environmental issues that cannot be ignored. These can affect your staffs, property, finances and the entire business. Poor management and use of assets have sometimes resulted into major industrial disasters that cost a fortune. Significant downtimes could also result. What about press news regarding some employee deaths in your enterprise resulting from your carelessness? Do you think these are good for your enterprise? Would you like to go to jail because of ignoring these issues? Certainly not. Therefore, if you are an entrepreneur who desires to enjoy your assets and steer clear of such, you need to embrace this tip regarding safety, health and environmental issues. If you are not sure, please consult. There are lots of regulations regarding use of assets. There are also many fines and penalties that are usually incorporated in the law to deter people from careless use of assets. Regarding environmental issues, you should also know that as an entrepreneur, you have the responsibility of protecting mother earth, because without this strategy your entire enterprise will not be sustainable. Never ignore this.
- Internal controls. Last but not least, let me now address matters of internal controls regarding fixed assets. Having in place and making use of relevant internal controls regarding fixed assets, is another top tip that ensures that you maximize your gains from your business fixed assets. Internal controls generally have goals such as safeguarding your assets, ensuring efficiency and effectiveness in operations, ensuring compliance to procedures etc. Regarding your fixed assets, internal controls govern acquisition, accounting for, use & maintenance and disposal of fixed assets. They also ensure you are consistent in following good guidelines and policies. Internal controls also help your enterprise in risk management regarding your fixed assets. Matters such as insuring your fixed assets to cover events of loss are all contained within your internal controls. Don’t you think these are valuable points Mr. Entrepreneur?
As I conclude, let me emphasize that fixed assets usually require heavy investment of resources. They are long-term in nature and hence your business needs to get the best from such long-term investments. You need to maximize your gains from your fixed assets. You can do this if you follow the above, plus other relevant guidelines you will get from other sources. If you don’t, there is certainly a price that you will pay. So, better take care! Again, after reading this blog, never say nobody warned you! Ok?
The Wise Entrepreneur