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Don’t Let Your Fixed Assets Sink Your Business

Asset management is a fundamental business process. It determines corporate value and has a direct impact on profitability.

One of my professors used to always tell his students a story about a company that he performed a work study at and discovered an elderly gentleman, let's call him "Thomas Bean",  who produced colorful graphs every month on the performance of a business-related resource or asset. I don't recall the specifics of the work, but I do remember that these graphs were meticulously produced every month, manually, and that they involved bar charts, pie charts and tables of data. The gentleman was relegated to some back office in the planning department.

During the study, Mr. Bean was interviewed and he proudly demonstrated the workmanship and effort involved in producing his reporting deck.  From here, the story becomes the classic stuff of urban legends like the million dollar Fisher Space Pen. Apparently, when asked what he did with the charts, Mr. Bean said that he took them down to the planning department and gave them to some named body there.

When that person was asked what he did with them, he answered that he would simply stack them up in the top of one of the filing cupboards in the planning office. Did anyone ever ask for them? - no. What did he do when he ran out of space? - he would take a bunch out from the bottom and shred them.  Did he know what they were or what they were for? - nope. He confessed he had only been doing this job for a couple of years and that he merely did what his predecessor did.

When quizzed further, the elderly Mr. Bean stated that he was engaged specifically to do this monthly report, that it involved gathering data from many sources and compiling it into a single study every month. He had been doing this for years and could name some of the other aging employees that were involved with his hiring etc.

The issue was escalated to the highest level and the comment that came back, was "that guy still works for us, we hired him like twenty years ago???" and "that study should have stopped back in ...., we either abandoned it or it was no longer relevant". In the end the story goes, they let the old man retire, never telling him that his work had been futile for the last  number of years, adding no value, no meaning.

In this day and age, such stories seem impossible or improbable. That's because we haven't quite descended to the depths of having people who are rarely accountable for anything. These days, businesses have mechanisms like performance management, job evaluations and full blown human resource departments whose whole reason for being, is to quite simply ensure that compliance, accountability and standards are applied to the work force. It is unlikely that people will fall through the cracks and remain unnoticed for decades producing meaningless work. There are always the proverbial ‘sacred cows' or protected employees and positions, but these are becoming increasingly rare one would think. I am not saying business handles people efficiently or that people are inherently efficient, just that the rules have changed.

It's funny then, that we don't deal with inanimate objects in business in the same way. I am reminded of this today when I think about a garage full of ‘stuff' most of which should head to the dump or the local charity shop. In many businesses it seems that a good housekeeping exercise happens less often than it should. Return on assets is a measure of how well business uses vested capital.  It reflects the profitability of existing investments, and provides a guide to returns on future investments, or at least that is the general idea.

A study by Nazir and Afsa entitled, "Impact of Aggressive Working Capital Management Policy on Firms' Profitability"  found that investors gave weight to the stocks of those firms that adopted an aggressive approach to managing their short-term liabilities. It could be argued that regular depreciation expenses related to redundant and defunct fixed assets ultimately plays into this sentiment about short term liabilities also. Further, companies that rent or lease plant and machinery for example may actually be better off than those that own assets. The balance between owned vs. leased of course is a perpetual problem. It hampers that consumer in relation to owing vs. renting, but for the business it is more significant because it often happens by accident that business lands up with a larger book of assets than it intended. For companies that use an ERP system like SAP, there are a number of mechanisms that help to account for and manage assets, but sometimes the volatility of business impairs business' ability to aggressively review, assess and write down or revalue assets. Using a product like Winshuttle Query, enables SAP customers in particular to quickly build complex queries of asset data using a combination of standard and custom tables, Infosets and logical databases to build on-demand point-in-time reports that can then be consumed by web-savvy products. These then consume web-services or are simply dumped into Microsoft Excel spreadsheets, Access Databases, SQL-Server databases or even SharePoint lists for later mining.

As Marcus Scholes, Vice President of U.S. Operations, Real Asset Management International says, "Asset management is a fundamental business process. It determines corporate value and has a direct impact on profitability."  He goes on to mention that  there are likely many multi-nationals that have good systems in place for recording initial investments, but simply  pay lip service to managing later asset disposal. As much as 50 percent of assets on the books are either poorly described or are no longer in use - worse, they cannot be located during a physical audit.

According to AMR (Asset Management Resources), a leading provider of asset inventory and reconciliation services, "After 14 years of experience, AMR has repeatedly found that 65% of fixed asset data is incomplete, inaccurate, or altogether missing, while 10% to 30% of fixed assets are no longer owned." It is not unreasonable to consider that if just 20% of all fixed assets are ghosts, business may be overpaying in terms of insurance and tax and ultimately understating profitability. Large inaccuracies in the Fixed Asset register pose a major risk to those responsible for the fiduciary management of a given enterprise.

Consider too, that fixed assets are thought to be a "material" item for Sarbanes Oxley compliance, requiring the documentation of internal controls within an organization; the AICPA defines "material" as being based on the assumption that a reasonable investor would not be influenced in investment decisions by a fluctuation in net income less than or equal to five percent and that "rule" remains the basis for working materiality estimates. Depending on how asset-laden your business is, you may already be courting the 5% value or higher.

One of the ways to address the specter of ‘ghost assets' is of course a physical audit of those assets. Although this may seem largely impractical in some businesses, it can be achieved through a couple of different approaches:

  • Continuous progressive Inventory - physical inventory can be done as "full inventory verification", "wall-to-wall inventory" or multiple partial inventories within different departments or geographic locations.
  • Assessment of asset materiality and physical inventory - this can be done internally but is a service that is often offered by your external auditors and third party organizations. Typically 3rdparty physical inventory companies only consider assets with a book value in excess ofUSD5,000 per item to be worthy of the expenses associated with a physical audit.
  • Write down/off all your assets with trivial book value and do this in the context of a review of your capitalization policy and avoid adding low value items in the future into the asset register

Whether you decide to use a product or simply attack the problem with manual brute force, there needs to be a clear and decisive attack made on redundant and defunct assets. Prevention of course is also better than attempts to cure. Tools like those from Winshuttle and others, are available, for both the extraction and updating of the asset master records but the process and policy needs to be clearly defined and articulated to all concerned. While you're at it, it might be a good idea to take stock of your personnel too, and make sure you don't have any examples of "Thomas Bean" wandering around your business clutching meaningless colorful pie charts...

Additional Reading:

International Review of Business Research Papers  Vo.2 No. 2. October 2006, Pp. 45 -58 Trends in Working Capital Management and its Impact on Firms' Performance: An Analysis of Mauritian Small Manufacturing Firms - KessevenPadachi

http://www.kerr-consulting.com/pdf/FAS_The_Cost_of_Spreadsheets_in_Fixed_Asset_Mgmt.pdf

http://www.businesspundit.com/are-your-company%E2%80%99s-asset-records-compliant-with-sarbanes-oxley/

http://www.aicpa.org/interestareas/employeebenefitplanauditquality/resources/accountingandauditingresourcecenters/downloadabledocuments/planning_materiality_tolerable_misstatement.pdf

http://www.depreciationmanagement.com/fas_pdf/Fixed%20Asset%20Manager's%20Guide%20to%20Sarbanes-Oxley.pdf

 

 

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Clinton Jones is a Product Manager at Winshuttle. He is experienced in international technology and business process with a focus on integrated business technologies. Clinton also services a technical consultant on technology and quality management as it relates to data and process management and governance. Before coming to Winshuttle, Clinton served as a Technical Quality Manager at SAP. Twitter @winshuttle