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Managing a Business’ Fixed Assets
This is one of those business terms that “non-accountants” try to avoid or even ignore altogether. I’m simplifying for you. It’s actually quite simple; it just needs some dedication and understanding. Enjoy the learning experience.
What are funds?
It is very important to understand this. Everything your business owns or has is an asset. Everything but nothing. Let’s go a little deeper into this; please note the following.
Bank account balances (if positive) are short-term assets
Petty cash account balances are always short-term assets
Long-term investments owned by the company are fixed assets
The supplied raw materials are working capital
Work-in-progress inventory is a current asset
Cash on hand is a current asset
Stationery on hand is a short-term asset
The cleaning material on hand is a short-term solution
The debtor’s entire balance is a current asset
Motor vehicles are fixed assets
Machinery is a fixed asset
Land and buildings owned by the company are fixed assets
Computer equipment is a fixed asset
Furniture and equipment are fixed assets
What are fixed assets?
In accounting terms, there are generally two types of assets; Fixed assets and working capital. The only difference between them is that working capital has a short lifespan, less than one year; while fixed assets have a longer lifespan; usually two years or more. These two types of assets are also treated separately in the balance sheet. That’s it, very simple. Not so?
For example, a company’s cash book (account) is a current asset. Why? Since the value changes daily, it is not stagnant or fixed. And it is very small compared to fixed assets like buildings, land, machinery etc. Also compare it with a fixed investment which is usually long-term in nature.
Toilet paper, stationery, supplies, raw materials, cleaners, staff refreshments and the like will not be around much longer. No more than a month before you use them up and need to be replaced. However, you will hold the land and buildings, vehicles, furniture, machinery, computers and office equipment for at least three years before you replace them; if not much longer. The latter are fixed assets.
Another important type of fixed asset is an intangible asset; an object or asset that you cannot touch or see. Above we only talked about tangible assets, things that physically exist. Intangible assets are:
Categories of fixed assets
Land and buildings
Machines and special tools
These are more general fixed assets. For a detailed list, see the Internationally Accepted Accounting Practice document or your local tax office’s list of recognized fixed assets.
FIXED ASSETS REGISTER
It is vitally important that you keep a record of your fixed assets in a fixed asset register, either in a spreadsheet or in a physical ledger. We can also use a database program that automates the process and is usually accurate. You can browse the Internet and local computer stores for them.
Your accountant will also have a register of fixed assets which will need to be updated each year for the audit and/or presentation of the annual financial statements. Always compare yours to his, make sure they’re up to date and a 100% match.
An added benefit is that you will be following your accountant/auditor.
Is wealth a luxury?
This is a question that company directors have to face on a regular basis. Luxury products have a negative impact on cash flow and profits and should be avoided.
For example, it is necessary to buy a company car. Which size and price range is the best fit? Is it to impress business owners? Or to make the person feel important? To what extent will it be for the person’s personal use? Can we actually afford it? Think carefully; don’t spend too much and then wonder why you have cash flow problems.
It’s amazing how often a large sum is paid for an asset when there are more affordable options available. Machines that are too productive are often bought. Its capacity is far beyond what is actually needed. The mindset is often, “well, we’d rather spend $250,000 and “overbuy” than stay with something that can become undersized and only cost $150,000″.
This is a valid argument, but it can lead to a big mistake.
Always go back to your original business plan. Follow the planned production and sales plan and act accordingly; or revise your business plan. The worst would be to produce 5,000 products per month, while the market will only need 2,000 per month for the next eight years (estimated capacity). You’d be stuck with 3,000 products per month piling up and paying to store them; because they are not going anywhere. A FATAL MISTAKE.
Do you see how important your business plan is? And that it needs constant revision and review? Treat it as a dynamic living document; your business bible.
When considering the purchase of a fixed asset:
Start with a minimum requirement when considering a new/replaced asset
When considering purchasing an asset, always think of the minimum requirements first and build from there. There are many factors to consider; here are some:
– Have you exhausted the list of suppliers?
– Did you use all sources to obtain this information?
– Have you considered all the variables, e.g. size, performance, life expectancy, price, utility?
– Have you researched the past of the models you are considering buying?
– Have you analyzed the reliability, maintenance and service requirements?
– To what extent does the purchase of the asset affect your cash flow? Do you have enough money? Do you need to take out a long-term loan or buy a rental property? Would it require a larger capital investment from the directors/owners to purchase?
– Can you actually afford it or is there a cheaper solution or alternative?
Errors in this regard are unnecessary. It is much better to spend enough time and take all precautions to ensure you make the right decision.
Secure all assets
This is vital. Make sure your assets are insured to their true value; thus ensuring that they are not over- or under-insured. This will cost you more money in the long run.
Overinsurance means wasting money on a high premium every month and receiving much less if a claim is made. Under insurance means paying a lower monthly premium, but receiving next to nothing when you make a claim.
Always make sure your insurance information is up to date, correct and verified by insurance companies.
Depreciation, revaluation and write-off of fixed assets
Depreciation is always carried out annually. For management reports and good corporate practice, it is better to do it monthly. This also enables more accurate monthly reports on operations.
Remember that you don’t want to leave out any hidden costs, such as depreciation, in your business reports.
Depreciation can be calculated using two standard methods; Straight line method or declining balance method.
Straight line method
Necessary facts and figures:
Expected life of the asset (e.g. vehicles are usually 5 years)
Purchase price (or real value) PLUS any additional charges (eg delivery charges and set-up charges)
– Calculation example:
The price of the vehicle is $60,000. Depreciable over 5 years (60 months)
60,000 divided by 5 = $12,000 per year or $1,000 per month
Falling Balance Method:
This method is performed using the same information as above, except that the depreciation percentage is always calculated on the reduced value.
Since the vehicle can be depreciated over five years, the percentage per year is 20%.
First year: 60,000 X 20% = $12,000 (same as above)
Second year: 48,000 X 20% = $9,600 (much less)
And so on.
The problem with this method is that the depreciated value never reaches zero. It’s complicated and the straight line method always works best for me. I suggest you use it too.
Revaluation of fixed assets
Revaluations can be difficult and should be avoided whenever possible. The revaluation of the fixed asset is only valid in two cases:
1. The asset was booked at an incorrect value.
2. The market value of the asset fluctuates and the new market value is truly and remarkably different from the original purchase price and associated costs.
This article is written for business owners and managers. If you experience such an event, talk to your accountant to recalculate the value and depreciation, as this is a complex accounting process. Remember that a revaluation will also result in a loss or gain, which must be reflected in your financial statements.
Write-off of fixed assets
This happens when the asset is stolen, destroyed or if it has become completely irreparable for a reasonable price. This is another case that will require your accountant’s attention. There is usually a loss on the write-off of fixed assets, unless the asset is so old that it has no current value. This requires special accounting attention.
If you were to dispose of a fixed asset, remember that there will be a gain or loss on disposal, which must be reflected in the financial statements. Please discuss this with your accountant as it requires special accounting attention.
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