Fixed asset management is the process of tracking, monitoring, and overall managing the physical assets of a business. With this process comes the management of an asset’s maintenance protocols, inventory levels, and accounting.
Fixed assets can be listed as long-term, physical, and non-current on a business’s balance sheet. No matter how they’re identified, fixed assets play a crucial role in the way a business generates its revenue.
Therefore, they must be expertly managed, whether that be via spreadsheets or an Asset Management Software solution.
The management of assets is a detailed process, from tracking equipment and monitoring performance to calculating depreciation and disposing of machinery in the most effective manner. To ensure efficiency, it’s important that a business chooses the right Fixed Asset Management Software.
What Are Your Fixed Assets?
Fixed assets are typically larger assets that are used in the daily operations of a business in order to generate revenue through the production of goods and services.
In accounting terms, they appear under current assets on a balance sheet and are not expected to be sold, consumed, or converted into cash within the current financial year. Making them long-term assets that offer at least one year of useful life and depreciate in value thereafter (the exceptions for this being land and property).
Fixed assets usually appear in a physical form and are listed on a company’s balance sheet under Property, Plant, and Equipment (PP&E). Although intangible assets can also be classed in the fixed assets bracket, such as copyrights and patents, fixed assets are more commonly seen as tangible. Examples of the fixed assets typically found in a business environment include:
- Buildings and property
- Machinery and equipment
- Office equipment
- Furniture and fixtures
What Is Fixed Asset Management?
Fixed asset management is the process of tracking and monitoring business-owned physical assets.
Much like other forms of asset management, such as ITAM and software asset management, monitoring assets is essential for any asset-intensive organisation relying on the production of goods and services to drive income.
A business can have multiple goals when it comes to managing its assets, including:
- Real-time tracking
- Monitoring equipment across multiple sites and locations
- Improving production efficiency
- Increasing operational output
- Optimising the useful life of assets
- Reducing maintenance costs and unplanned downtime
The key to successful asset management is through the use of a digitalised, preferably cloud-based, software tool. Also known as Fixed Asset Management Software.
A good asset management solution will provide the tools necessary to effectively manage all fixed assets that are accounted for on a business’s balance sheet. It does so by providing users with various functions and features.
Asset Tagging and Tracking
The use of asset tracking tools and technology in the form of asset tags lays the foundation for being able to track fixed assets in real-time. Typical asset tagging devices include barcode, QR code, RFID, and GPS.
Not only does this allow for real-time location tracking to minimise the costs associated with lost and stolen equipment, but IoT devices can also be used to track asset performance and monitor equipment conditions.
Fixed Asset Registers
A key feature of any asset management system is to provide businesses with visibility of what assets they’re responsible for. This is achieved by creating a fixed asset register.
A fixed asset register provides the capabilities to input all data into one centralised system. That includes asset information such as purchasing costs, maintenance schedules, and last known locations. This data can be accessed by staff and other stakeholders through the use of a cloud-based tool.
Asset Lifecycle Management
The process of using asset tracking tools can start to improve the way businesses view their assets. One of which is being able to build and monitor the lifecycle management of each asset.
Asset lifecycle management is a strategic and analytical approach that can be broken down into four stages; planning, purchasing, operation and maintenance, and disposal of assets.
Through this approach, businesses have the best chance of being able to extend each asset’s useful life. As well as calculating depreciation value, identifying asset roles, ensuring health and safety, and taking a preventive maintenance approach to assets and equipment.
Why Managing Fixed Assets Is Important
As well as being some of the most important purchases that a business will make in a financial year, fixed assets are also the most expensive. So, in order to maximise investment value and ensure the best return on investment (ROI), it’s important that each asset is managed effectively.
Fixed assets are the backbone of a business’s operational output. Meaning, without proper management, production can slow and revenue can drop. Other factors that organisations experience without the use of a proper asset management tool include:
- Poor inventory management
- Health and safety violations
- Failure to meet compliance standards
- Assets being lost or stolen
- Production-critical equipment failures leading to unplanned downtime
- High maintenance and repair costs
For businesses that rely heavily on their assets, particularly large organisations and enterprises tracking inventories across multiple sites, a fixed asset management solution is essential. As well as maximising value for money – according to the ISO 55000 international standard – asset management processes can reward businesses in various ways.
Greater Visibility of Fixed Assets
Through tracking solutions such as tagging and IoT devices, businesses are able to collect various forms of asset data and store it in a centralised fixed asset register. This can help to reduce costs associated with the loss or theft of equipment. As well as identify and eliminate ghost assets that a company may still be paying insurance premiums on.
Having better visibility of assets also helps to improve stock control and inventory management. This is particularly useful for a business that relies on having spare parts available at the right time, such as a manufacturing operation. One company that saves millions of dollars each year through asset tracking is Air Canada, which track all their food carts used in airports around the world.
Maximise an Asset’s Useful Life
A key factor in generating a good return on investment is by extending a fixed asset’s useful life. Although marked down as long-term assets, an asset’s useful life is usually within the first year of purchase. From then on, as wear and tear begin to take hold, an asset will depreciate in value. But that’s where the tools of an asset management system can be effective.
By being able to continuously monitor the performance and condition of machinery, equipment, and infrastructure, businesses can slow the rate of depreciation by deploying maintenance schedules. Particularly through a preventive maintenance strategy that involves regular and routine maintenance of equipment to reduce the likelihood of failure leading to unplanned downtime.
Unplanned downtime can be so damaging that in 2016 alone it single-handedly cost businesses $260,000 per hour.
How to Account for Your Fixed Assets
The three most common types of fixed assets are property, plant, and equipment (PPE). Fixed does not mean that the asset cannot be relocated or moved. Some businesses may move fixed assets between locations and will initially hold a fixed asset for more than one reporting period.
However, what one company considers a fixed asset, might not be considered a fixed asset in another company. For example, an IT company might consider their computer equipment as a fixed asset. But, a company that sells computers would not consider their computer equipment as a fixed asset since it is their merchandise.
Depreciation is the decrease in value over time. Most fixed assets depreciate but property – such as land or real estate – usually does not depreciate over time. When submitting balance sheets, it is important to not have significant bumps and drops in total assets.
Instead, it is a better accounting practice to have more accurate reporting of assets’ values over their useful life. It is beneficial to report the fixed asset with its value spread out over the estimated lifespan.
Linking Profitability With Fixed 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.
Methods to Calculate Fixed Asset Depreciation
Fixed asset depreciation describes the reduction of the value of a fixed asset over its useful life. As a result, depreciation is a calculated expense that may be related to technological obsolescence and wear related to time. Depreciation is applicable to a variety of tangible assets such as vehicles, tools, tech equipment, and offices.
The most basic way to account for depreciation is using the straight-line depreciation method. The company will calculate the value of the depreciation expense in equal instalments over the reporting period. This depreciation method is basic and since it expenses equal amounts every year, it is simple to follow with the following formula:
Straight Line Depreciation Rate = Purchase Price of Asset/Salvage ValueUseful Life of Asset
For example, a food delivery company purchases a £25,000 delivery van which is estimated to have a useful life of 10 years. The salvage value is £1,000. Using the straight line depreciation method, the company would calculate £25,000 subtract £1,000, then divide the result by 10 years, to result in £2,400 per year.
Double Declining Balance
The declining balance method for calculating depreciation is an accelerated method. The advantage of this method is that businesses can deduct more at the beginning of an asset’s life to help pay less tax initially. This method is also called the reducing balance method. It is one of the two more common methods used in fixed asset depreciation.
The double declining balance method simply depreciates assets twice as fast as the declining balance method. Organisations typically use this method when accounting for the depreciation of assets that lose more of their value early in their useful life, or for assets where obsolescence is a concern. The double declining balance method has larger expenses during the beginning of the asset’s useful life and smaller expenses in later years. The formula used to calculate double declining balance:
Depreciation Expense = 2 Straight Line Depreciation Rate x Book Value
For example, a courier company purchases a delivery truck for £25,000 and is expected to have a useful life of 10 years. The straight-line depreciation annual rate would be 1/10 years, at a rate of 10% per year. The rate is doubled according to the formula to 20%, this value is deducted from £25,000 during the first year for £5,000 expensed in the first year. In the second year, 20% of the remaining value, £20,000 would be deducted for £4,000. The deductions would continue until the book value equals the salvage value.
Units of Production
The unit of production method used to calculate the depreciation of an asset is most suited to situations where an asset’s value is closely tied to the number of units it produces instead of the years it is in use. As a result, there are greater deductions when the asset is being heavily used and conversely, less when the asset is used minimally. This is a contrast to time-based methods such as straight line or accelerated methods.
Depreciation Expense = (Original Value – Salvage Value)Units Produced (During period)Total Production Capacity (Units)
Essentially, the expense claimed per year using the units of production method is based on how much of the asset’s capacity was used during the reporting period.
For example, a manufacturing company purchased a machine that can produce 1,000,000 metres of cloth over its useful life. The machine cost £20,000 to purchase and has an estimated salvage value of £2,000. During the first year, the machine produced 50,000 metres of fabric. As a result, the depreciation expense would be £20,000 subtracted £2,000, which results in £18,000. The percent of the capacity that was used in the first year is calculated by dividing 50,000 by 1,000,000, which is 5%. Therefore, the depreciation expense for the first year is £18,000.
Sum of Years’ Digits
Another accelerated method for calculating fixed asset depreciation is the sum of years’ digits depreciation method. As this is an accelerated method for calculating depreciation it better represents the value of assets that use more of their useful life in their earlier years.
Depreciation Expense = (Original Value – Salvage Value)Remaining Useful LifeSum of Years’ Digits
For example, a company purchases an industrial machine for £275,000. The expected useful life of the machine is 5 years and the salvage value is £50,000. The sum of years can be described by the nth triangular number of the number of years the asset is useful. Simply put, the sum of years’ digits for 5 years of useful life is 5 + 4 + 3 + 2 + 1 = 15. See the below schedule for depreciation of the industrial machine:
Remaining Useful Life (Years)
Sum of Years’ Digits
Summary of Table
Depreciation base: This is the Original Value minus Salvage Value, which is £50,000 minus £5,000, so£45,000
Sum of Years’ Digits: Equal to 5 + 4 + 3 + 2 + 1 = 15
Expense: The expense in Year 1 is calculated by multiplying the Depreciation Base by the Remaining Useful Life divided by the Sum of Years’ Digits, which is 5/15 = 33% for the first year.
Book Value: The Book Value carries over each year with the expense being subtracted from the purchase price initially until it reaches the salvage value.