Challenges and Benefits of Fixed Asset Management
In this article, you will find quick guide about fixed assets, and the challenges and benefits of fixed asset management.
What are Fixed Assets?
Fixed assets are resources controlled by an entity which are used in its operations to generate income. Other times termed as property, plant and equipment or capital assets, fixed assets are long-term assets that are not expected to be converted into cash within a year. Examples of fixed assets include buildings, machinery and equipment, laptops, vehicles, and office furniture and fixtures.
Challenges of Fixed Asset Management
Fixed asset management is the process of monitoring and maintaining the company’s fixed assets. As easy as it may seem, many companies are struggling to accurately track all additions, movements, sales and disposals of fixed assets. Here are some reasons why:
- Untimely recording. With the many fixed assets that need to be accounted for and the movements of which, it becomes challenging to maintain a real-time tracker. In turn, companies find themselves questioning why an asset is still reported in a certain location when it is known to have previously been transferred. There are instances as well when an asset is stolen but it will only be discovered later when the company records are now being scrutinized.
- Large volume of data. Since capital assets are used by the company on a long-term basis and depreciated over their useful life, data on these continuously increases at a rate faster than their being written off in the accounting books. As an accountant or the person responsible for tracking these assets, it becomes very tedious to monitor.
- Documenting the fixed asset lifecycle. Problems on proper documentation may arise due to lack of training on how to properly receive or supervise the asset movements. For example, we miss recording an asset acquisition because the purchase was not properly communicated. Other times, it is possible that we had a bulk delivery and some assets were overlooked in the documentations.
Benefits of Effective Asset Management
On the other hand, with an effective asset management procedure, the company experiences a lot of positive externalities like the following:
- Maximizing returns on investment. If we can effectively track our property, plant and equipment, we can ensure that they are used when the need arises. In which case, we can optimize the usage and profitability of the fixed assets.
- Cost cutting. When we have a good account of all our fixed assets and their usage and remaining useful life, we can determine how to properly allocate them. For example, if a certain branch needs an asset and another branch has it in place but is not utilizing it now, the fixed asset can be assigned to and used by the branch that needs it now. This way, we avoid purchasing new items and instead, make use of non-productive assets. We also save on transportation costs by transferring an available asset from the closest option available.
- Theft prevention. Complete accounting records minimizes the chances that assets come in, move around, or possibly even be stolen without the company’s knowledge.
- Plan for risk exposure. With accurate information on the whereabouts and conditions of each asset, the company can evaluate possible exposure to any financial, operational or legal risks as a result of utilizing a certain fixed asset. For example, we can minimize operational risk exposure through timely prediction of when the equipment will break down and be prompted when it is time for a replacement.
- Correct reporting in financial statements. Accounting for fixed assets is complicated because we don’t only look at the acquisition cost but also consider capitalizable costs, depreciate them over time, and record any internal transfers. In addition, we also account for the sales or disposal of them over time. If our monitoring is reliable, we prevent understatement or overstatement of capital assets in our financial statements. The impact of correct reporting is guided decision making for the management and minimized risk exposure come audit season.
How to Effectively Monitor Fixed Assets?
With all the benefits waiting to be realized, the question now is how we can establish an effective process for fixed asset management. Learn about the different considerations and the steps to effectively managing your assets here (Related: Establishing Internal Controls for Fixed Assets Management).