Most companies have at least some fixed assets, whether that’s property, plant or equipment. These need to be accounted for like any other asset, but this is harder than it seems. Items can go missing, and each one will have a different useful life and salvage value, meaning depreciation will need to be calculated differently.
While this might not seem like a major issue, bear in mind that parts of both your tax and insurance costs are calculated based on the value and depreciation of fixed assets. If these aren’t worked out correctly, your company could be overpaying a significant amount. Proper fixed asset optimization is therefore an essential method of cost-saving.
It’s thought that the average company is overpaying taxes and insurance on around 12% of their fixed assets. This represents a significant cost, and it’s one that can be almost eliminated if the correct steps are taken. Here’s how your company can optimize its fixed assets to save money:
Get rid of ghost assets
What happens when fixed assets you own break, go missing or get replaced without that being recorded? In these cases, they become ghosts: assets that exist in your books, but that you don’t actually own. Of course, that means you’ll still be paying tax on them even though they don’t actually exist in your company.
This is more likely than you might think. It’s estimated that 30% of companies don’t know what fixed assets they own, where they’re located or by whom they’re being used. Ghost assets take up 15-30% of the average company’s inventory, all of which are being unnecessarily factored into tax and insurance payments.
There’s no easy solution to getting rid of these; doing so requires you to take a full inventory and accurately record all of your assets. This might be a large endeavour, but it needs to be done in order to keep track of what you do and don’t own. While undertaking this, you should also consider tagging all your assets.
Implement a tracking system
If your business has a mixture of old and new laptops that are identical besides their age and one goes missing, how do you know whether it was from the old or new group? This might not seem important, but remember your tax and insurance will be different for the two groups of laptops. In order to keep an accurate database of your assets, a tracking system is necessary.
The best practice for this is to use barcode labels to track each individual asset. That way if something breaks or goes missing, you’ll be able to ascertain exactly which asset it is. Some organizations recommend QR codes instead, but the overall aim is the same: to create a way of distinguishing between different assets and tracking them.
You’ll need to consider a few things when designing this system (or purchasing one). The physical properties of the tags are important, as you won’t want them to get damaged or go missing. If your organization works with machinery, for example, you might need tags that are capable of withstanding high temperatures.
Track depreciation accurately
All of the above enables you to properly track the depreciation of your assets, giving you a much clearer picture of your business’ finances. Depreciation is theoretically simple: take the cost of the asset and divide it by the number of months it’s expected to be useful to your business. A $1,000 laptop that will last you five years (or 60 months) will depreciate by around $16.67 per month, for example.
You also need to take into account the amount you’ll be able to sell or scrap the asset for at the end of its useful life. If the laptop above can be sold for $200, then you take that off its initial value. This is called straight line depreciation. Doing this will enable your business to be taxed accurately and not have to overpay insurance.