Have you ever walked into your office on a quiet day, perhaps on a weekend or holiday when no one else was there, and just surveyed the scene? Chances are you saw a professional space filled with computers, desks, chairs, and filing cabinets. While they might seem unremarkable to the average person, they have a special designation in the world of finance. They’re known as fixed assets.
Fixed asset depreciation, the process of tracking the life cycles of fixed assets and reporting their value for insurance and tax purposes, is one of the most important financial processes in any business or organization. Many companies struggle to accurately log and report on their fixed assets, however, overpaying insurance premiums and taxes as a result. Here’s why fixed asset depreciation is a common challenge and how companies can get back on track.
Challenges in calculating fixed asset depreciation
Fixed assets are a critical enabler of business growth. Any organization is going to need computers, copy machines, desks, and office equipment in order to thrive and do what it does best, no matter the industry. But all of these assets need to be tracked and depreciated over time according to complicated schedules. Depending on the asset involved and the rules and regulations that apply to it, an individual asset may depreciate according to a specific schedule or a particular method.
If a company does not know with certainty what fixed assets it has on the books, which is fundamental for calculating fixed asset depreciation, then it will soon have a complex and time-consuming problem on its hands. For example, it’s not uncommon for a business to manage its fixed assets inventory and depreciation schedule using spreadsheets, conducting informal and ad hoc surveys of fixed assets to update its records when the staff has time. This can lead to gaps in record keeping, quickly throwing the inventory off kilter.
Tracking and depreciating fixed assets can be challenging when the finance team is often busy enough as it is preparing high priority budget materials and navigating yearly audits. In some cases, the finance staff may have to partner with other areas of the organization such as the IT department or regional offices, which may have their own records of the fixed assets they manage, and the process of reconciling multiple sets of records can add an extra administrative burden for everyone involved.
This method of managing fixed assets, while commonplace, can prove to be expensive both in terms of staff time and capital. First of all, manually managing fixed assets in this way eats up a considerable amount of staff time that could be better invested elsewhere. In fact, it’s one of the most common productivity drains that plague growing businesses. Secondly, if assets that are no longer in service are not properly disposed of in accounting records, companies can continue to overpay property taxes and insurance costs associated with them.
How inaccurate fixed asset depreciation results in an overpayment
So how much does an inefficient fixed assets process cost an organization? On average, companies are overpaying taxes and insurance on approximately 12 percent of the fixed assets on their books. Even mistakes in the amount of depreciation calculated can result in an overpayment since insurance premiums are usually based on a percentage of the total current value of fixed assets.
Businesses can end up missing out on deductions to which they would otherwise be entitled. Ultimately, a company could be saddled with a higher total cost of ownership (TCO) for its fixed assets than is necessary. As a result, an inefficient fixed asset depreciation process can cause that company to waste capital that it could otherwise be applying toward smart investments that help the business grow.
The opportunity costs involved with managing fixed assets in this way aren’t solely financial. Softer costs associated with staff time and efficiency also come to bear. When finance professionals are stuck in the weeds trying to sort out whether specific assets still exist at the company and whether they are properly being depreciated, they must sink time into that task that they could otherwise devote to higher value projects at the company, like ensuring better GDPR and POPI compliance or producing strategic financial analysis for executive leadership.
On top of that, the lack of a strong fixed asset management practice can even call the accuracy of financial reports into question, which is a headache that no finance team needs or wants. Indeed, assets that are not closely tracked can go missing or be stolen outright, consuming additional staff time and costing the company even more money when those assets must be replaced. After encountering these challenges, many companies begin exploring ways to get back on track so they can save time and money.
How to get back on track and save money
Fortunately, there a simpler and less costly way to manage fixed assets. With fixed asset tracking software, an organization can maintain a healthy fixed asset register and adequately insure its assets. Doing so can also save staff time, enabling the finance team to focus its expertise and talent on projects of greater value to the company. Here are three ways to get back on track, accurately manage your fixed assets, and pay only for the assets that your company uses.
- Create a complete inventory. Generating a complete inventory of the fixed assets your company has on hand doesn’t have to be so difficult. With barcode readers, you can conduct a complete inventory of your fixed assets—in multiple locations, too, if you have them—and automatically reconcile all of those records at one central location. Eliminating silos in this way eliminates instances of duplicate data entry, saving staff time and eliminating headaches.
- Streamline the fixed asset lifecycle. Once you know what fixed assets you have, then comes the fun part: figuring out which depreciation methods apply to each one of them and determining how best to manage their life cycles, from the point of acquisition to disposal. Smart fixed asset tracking software can play a clutch role here too, assisting with everything from depreciation calculation and cost allocation to year-end financials. It can even digitally store images of key asset records, providing a single point of reference for each asset the organization owns. This way, rather than reactively chasing down information on fixed assets, the company can proactively plan its future investments and better maximize its ROI on them.
- Invest in fixed asset tracking software. Spreadsheets, while useful in many ways, can only take your company so far when it comes to managing fixed assets. After a certain point, it’s worth investing in fixed asset tracking software, which can intelligently streamline the above processes and much more. Doing so can give your company more insight into its fixed assets, minimizing their TCO while simplifying operational and financial workflows.
Fixed assets may appear complicated at first glance. After all, they can be subject to a multitude of rules, regulations, and depreciation methods while being physically located in a wide range of geographical locations and therefore difficult to keep an eye on, and that’s before we even get to the sticky wicket of spreadsheets and information silos. There’s a better way to manage them, though, that can ensure cost savings for the company and enhanced productivity for everyone involved. With a streamlined process for tracking and depreciating fixed assets, they can simply be part and parcel of a well-run organization, enabling its growth rather than hindering its progress.
Editor’s note: This article was originally published in 2018 and has been updated for relevance.