Updated: May 2021, August 2021, January 2022
From planning to disposal, life cycle management has a direct effect on asset profitability. From 2010 to 2016, asset management companies had an average profit margin of 36%. It is for this fundamental reason that Asset Management Software should be a well-thought-out decision. It shouldn’t be seen as the only means of maintenance management. Or even service management or building asset registers.
How to Link Profitability With Asset Management
A balance sheet has two components; assets and liabilities. The equity or profitability of any company equals assets minus liabilities. For most asset-intensive businesses, profitability is a direct function of how assets are chosen. As well as managed and disposed of.
As an example, consider Tesco’s and BP’s balance sheets. These are two big organisations operating in different domains. But, both list facilities, plants and equipment under their assets category. Whilst these are multi-billion pound companies, managing assets and making a profit remain the same.
We can agree that managing assets has a direct impact on profitability. Taking a simple approach, calculate the total value of your assets. Let’s say, as an example, it’s £10 million. now, assume two scenarios:
- An asset management tool is deployed incorrectly
- An asset management tool is deployed correctly
Let’s assume in the first scenario you get 6% more return from your total assets across 5 years. This equates to £600,000. In the second scenario, you get 10% more return from your total assets across 5 years. This will be £1,000,000.
So your company will make £600,000 to £1,000,000 more with the right asset management software. By the way, getting 10% total efficiency from well-managed assets is realistic. You now have the data of how much more profitable your company can be with the right asset plan.
Relate Your Profitability to Asset Management Features
The starting point here is a classification of your assets. Let’s say 40% of your assets are Facilities, 40% are Equipment, and 20% are Consumables and Inventory. If we take £1,000,000 as the total possible profit from assets, then £400,000 will come from facilities. With £400,000 from equipment and £200,000 from inventory management.
In theory, this should be the case. But, in practice, it is entirely possible to get profitability of £600,000 from inventory management. Then £300,000 from equipment, and £100,000 from facilities.
The profit percentages from your asset types will vary based on your business circumstances. The message here is, appreciate splitting your estimated profits by asset types.
Let assume £400,000 will come from Facilities and Equipment each and the additional £200,000 from Inventory. This means your software should have strong Facilities and Equipment Management features. Inventory management features can be just okay or satisfactory.
A parallel perspective is, no tool is good at everything. Each product has some strengths and some weaknesses. The software you choose should be strong in Facilities and Equipment. Simply because that’s where your profitability is going to come from.
For facilities management, time tracking and booking are going to make you more profitable. Because of this, your product should be strong in time tracking and booking management. Even a bespoke development could be considered based on profitable features.
How to Secure Buy-In From Stakeholder
Profit by assets and its links to Asset Management Software is a powerful way to get buy-in from management. In many ways, it will be difficult for anybody to pick holes in your approach.
Your approach may go something like this: “We can make a profit of £1 million from our assets across the next five years. 40% of it will come from our Facilities, 40% from our Equipment and 20% from Inventory Management. Hence, the software that we have chosen is strong in Facilities and Equipment. It costs £200,000 across five years, giving us a 500% return on our investment.”
How to Review Your Asset Strategy
It is not just for management buy-in, but a profitability approach can be used in several ways. Such as implementing and reviewing your software decision until you meet expected profitability targets.
As an example; two years into your asset management strategy, if you realise the market conditions have changed and your profits are now going to come from Inventory Management and not Facilities, then you know you either need an advanced inventory management module or you need to get it developed as a custom offering (in fact this is how most companies end up buying different tools. It is recommended to adapt and modify the current tools rather than add new ones—most businesses underestimate the value of data consistency and integrity that you get from one system).