8 ways to Manage Fixed Assets Effectively
In current competitive business environment, organizations view business profitability not just as a function of revenue, but also better management of resources. Fixed assets often comprise a significant portion of the total assets of an enterprise, and therefore secure an important position on the Balance sheets. The very fact that they are not liquid probably explains why most companies lose control of these assets.
1. Accountability and safe custody of assets:
Safe custody of assets is the most important function in fixed asset management and can be accomplished by assigning a responsible person as a custodian. Establishing accountability of assets would result in increased levels of security and help reduce incidences of theft and misuse considerably, which would otherwise directly reduce bottom line and cash flows. Maintaining high standards of data integrity and custody of documents of ownership (e.g. land ownership) are good risk management measures.
2. Fixed Asset Tracking:
Enterprises with large number of assets, especially movable assets need to step up their fixed asset tracking processes in order to keep their asset safe and productive. Maintaining up to date asset information by keeping track of their location, usage, custodian, maintenance, insurance etc. could help managers maintain their safety, productivity and efficiency.
For example, in case of a sale persons provided with cell phones/hand held devices for CRM purposes (cell phones are assets with useful life of 2-3 years). Asset managers with additional information will be equipped many ways to keep track of the cell phones (along with their types, models & capabilities) assigned to sales employees to establish accountability. This also helps to ensure that the right assets are allocated to the right people and departmental units at the right time.
Their replacement date to ensure CAPEX is adequately budgeted and cash flow is available on time for upgrade. Their location with RFID feature makes sure they are productive and not being misused;
Maintaining cell phone images can also greatly help identifying them quickly for their upkeep and security purposes.
3. Asset life cycle management with robust audit trail and history:
Asset life-cycle management is the process of controlling, monitoring and accounting for assets throughout their life cycle. Tracking and recording every detail of every action ever made by any user from acquisition date through the date of disposal; while preserving the entire history of the asset.
This significantly helps to improve asset life cycle planning, allowing monitoring of assets utilization and planning for their preventive maintenance and replacement as and when required. Keeping track of warranty, annual maintenance contract and insurance reduces undue costs due to mismanagement.
This process also ensures robust audit trail and enforcement of internal controls to meet compliance norms as well as detect, analyze, and correct any significant errors and omissions before they affect the accuracy and profitability in financial statements.
Further, linking ‘parent/child’ assets (e.g. PC as parent, software as child) can enable establishing hierarchical relationships and dependencies. This interconnected information can ease tracking, depreciating, maintenance and disposal of child assets.
4. Tagging physical assets:
Practice of asset labeling provides goes a long way in effective and appropriate management and control of assets. Tracking assets is eased when fixed assets are tagged with unique identifiers as asset IDs. Bar codes are helpful incase assets are managed with fixed asset management software in place. Additionally, it also speeds up physical asset audit process by identifying assets on floor with assets on tag.
Where an enterprise owns multiple fixed assets that are nearly identical like laptops, it can be very easy to make mistakes by creating duplicate asset records or failing to dispose of the correct asset when identical assets are retired.
5. Conduct physical asset verification:
For the purpose of optimal management, asset managers should resort to periodical physical asset verification to ensure existence of asset. Physical verification would call for reconciliation of the results with asset records in books. As part of the reconciliation, exceptions should be identified and reported for action if any.
Physical asset verification helps in identifying ghost assets. A ghost asset is one that is lost, stolen, or unusable, but is still recorded as an active fixed asset. Assets that physically exist, but are not recorded can also be tracked and brought into books with retrospective impact. This would in turn surface inefficiencies in the asset acquisition and control process that require necessary attention and correction for safeguarding assets.
Best practices may include matching, scanning, and attaching corresponding invoices to your asset records. This provides management with accurate assessments of the fixed asset across the entire organization as to where critical assets are located, in what condition and how efficiently they are being used.
6. Meet compliances and consolidating information:
Complying with various legal, statutory and tax rules and regulations (e.g. Companies Act, Income tax act, Internal auditing standards; etc.) can be accurately carried out by maintaining complete asset information across its life cycle along with timely and reliable reporting. Computing accurate depreciation, impairment testing and allowances would establish credibility of financial statements and provide tax benefits as eligible.
For businesses operating across the globe, consolidating multiple books allow important asset information to be shared across multiple companies, enabling compliance with both local and group depreciation practices and policies. Consolidation at one single place can provide insights for quick and informed decision-making. It also means that multiple lines of business can share and act on the same asset information including financial depreciation, net book value, shipping, asset locations, customer issues, recalls, life, and replacement value.
7. Establish SOPs & strong internal control:
Standard Operating Practices (SOPs) create a consistent and repeatable means to effectively manage all fixed assets throughout an organization. Fixed assets being normally high value items, establishing SOPs and internal controls would ensure their acquisition; maintenance and disposals are adequately managed leaving little risk of incidences such as existence of ghost assets, theft, misuse & errors that eventually erodes profitability of business.
Documenting relevant depreciation policies and implementing them across the organization would reduce the chance of errors in accounting and reporting of financial data to stakeholders, and at the same time internally using such reports for decision making.
For example – decision of setting up capitalization threshold as a policy may impact profits for the year significantly.
8. Asset analysis and ROI scrutiny:
Conducting regular fixed asset analysis of its usage, installed capacity, utilization, functionality, etc. would provide deep insights for critical decision – making and action that would substantially upscale return on investment (ROI) of assets and overall business profitability.
Analysis would surface whether:
- 1. Fixed assets are being used efficiently at full capacity;
- 2. Additional capacity building or up gradation is required;
- 3. Any idle assets in possession which can be put to use without any additional costs;
- 4. Assets require maintenance or replacement reducing downtime or stopping production;
- 5. Particular profit center is able to recover the ROI of the asset.
With 8 ways of improved asset management, organizations can:
- 1. Maximize the return on capital investment;
- 2. Reduce risks and increase efficiency of asset management, saving costs and administrative time;
- 3. Improve the accuracy of both financial and tax reporting and compliances
- 4. Make effective decisions to improve overall organizational profitability and support growth.