Managing Fixed Assets

Every business needs to have some form of fixed assets to different extents. It would be at peak especially in the organizations in the transportation and manufacturing sectors. Acquisition of fixed assets is a long-term investment that causes a big strain on the liquidity of an organization. Therefore, acquisition of fixed assets should be limited to the immediate needs of the company plus a reasonable allowance for growth in the next few years. Their grandeur or prestige value should never be the main considerations. Acquisitions should also be made at the least cost to reduce the outlay on fixed assets, and divert more funds for working capital needs.

Acquisition of fixed assets should be accompanied with meticulous planning and attention to detail. At the inception, you may take advantage of market research already available for the industry to determine your probable share of the market segment. You may also do some research of your own, if necessary.  Target the barest minimum of fixed assets to achieve the desired level of production or output keeping a reasonable allowance for expansion. In estimating your requirement of fixed assets, consider the capacities and their respective costs involved. This could be further subjected to a careful consideration of the pros and cons of the following factors:

  • Consider the option of building or fabricating the buildings/machinery/equipment concerned on your own or by employing contractors rather than purchasing from outside.
  • Purchase used items instead of brand-new.
  • Negotiate for the most favorable payment terms in all instances.
  • Take on lease instead of purchasing outright to spread the investment over a larger number of years and to conserve working capital in the short-term.
  • Consider the now popular chattel mortgages for motor vehicles, with their attractive tax and cash flow benefits.
  • Consider renting space rather than building or purchasing building space.
  • When it comes to replacement of assets (where you are already into the business for quite some time) consider refurbishment as an alternative to replacing with new items. Assign adequate weighting to the possible benefits accruing to the organization in virtue of advanced technology behind newer models as against the possible obsolescence of your existing ones.
  • If your buildings are too spacious for your requirements, convert excess space to money by renting out. In the alternative, utilize excess space for undertaking sub contract work.
  • Similarly, outsource or lease out underutilized vehicle/machinery/equipment capacities; or utilize them profitably for doing sub contract work for outside agencies.
  • As you reach your optimized capacity utilization levels, don’t rush to purchase new fixed assets to meet additional orders. Try outsourcing and sub contracting out initially until new orders reach levels to warrant the consideration of any additions to existing fixed assets. The policy should be to defer new additions rather than advance them.
  • Periodically monitor the efficiency of plant and machinery layout for maximizing production and minimizing production costs. Have a system in place for the constant monitoring of capacity utilizations of all plant and machinery. This will help you in the timely detection of any idle, underutilized or redundant equipment as well as white elephants (if any).
  • Dispose of all excess and uneconomical fixed assets.
  • A sound system of fixed assets managements should take in to account the accident proneness and possible hazards faced by their operators and others who have to move in their immediate vicinity. Have all necessary safety precautions also incorporated at the time of installation itself of new plant and machinery.
  • All motor vehicles, fixed plant and machinery as well as all movable or immovable equipment etc. should be assigned to the care of one or more specified employees. Those specified employees should be held responsible for maintaining them in good order by adhering to proper and timely maintenance schedules. The whole operation should come under the surveillance of a senior engineering manager.
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