What is Asset Management?
Asset management refers to the process of developing, operating, maintaining, and selling assets in a cost-effective manner. Most commonly used in finance, the term is used in reference to individuals or firms that manage assets on behalf of individuals or other entities.
Every company needs to keep track of its assets. That way, its stakeholders will know which assets are available to be employed to provide optimal returns. The assets owned by any business fall into two main categories: fixed and current assets. Fixed or non-current assets refer to assets acquired for long-term use, while current assets are those that can be converted into cash within a short amount of time.
When it comes to asset management, managers often deal with two main concerns. The first is what role does the asset management process play? Second, how can a firm develop a good asset management plan?
Importance of Asset Management
There are several reasons why businesses should be concerned about asset management, including:
1. Enables a firm to account for all of its assets
The process makes it easy for organizations to keep track of their assets, whether liquid or fixed. Firm owners will know where assets are located, how they are being put to use, and whether there have been changes made to them. Consequently, the recovery of assets can be done more efficiently, hence, leading to higher returns.
2. Helps guarantee the accuracy of amortization rates
Since assets are checked on a regular basis, the process of asset management ensures that the financial statements record them properly.
3. Helps identify and manage risks
Asset management encompasses the identification and management of risks that arise from the utilization and ownership of certain assets. It means that a firm will always be prepared to manage any risk that comes its way.
4. Removes ghost assets in the company’s inventory
Instances exist where lost, damaged, or stolen assets are erroneously recorded on the books. With a strategic asset management plan, the firm’s owners will be aware of the assets that have been lost and will eliminate them in the books.
Developing a Strategic Asset Management Plan
Asset ownership is part of any public or private enterprise. To manage the assets effectively, a firm owner needs to develop a strategic plan.
1. Complete an asset inventory
Before anything else, an owner needs to take count of all the assets that he owns. If he is not aware of the exact number of assets in his inventory, then he won’t manage them effectively. When preparing an inventory of company assets, the following should be included:
- Total count of assets
- Where the assets are
- The value of each asset
- When the assets were acquired
- The expected life cycles of the assets
2. Compute life-cycle costs
If a business owner wants his asset management plan to be precise, then he should calculate the entire life-cycle costs of each asset. Many company owners make the mistake of calculating only the initial purchase costs.
During the asset’s life cycle, additional costs are likely to come up such as maintenance expenses, condition and performance modeling, as well as disposal costs.
3. Set levels of service
After computing the life-cycle costs, the next step is to set levels of service. Put simply, it means outlining the overall quality, capacity, and role of the different services that the assets provide. In doing so, a firm’s owner can then determine the operating, maintenance, and renewal activities needed to keep the assets in good condition.
4. Exercise long-term financial planning
Ideally, the asset management process that a firm owner adapts should easily translate into long-term financial plans. With a good financial plan in place, the owner can then assess which objectives are feasible, and which ones need to be prioritized.
Benefits of Asset Management
There are many benefits of adopting an asset management strategy, such as:
1. Improving acquisition and use
By keeping tabs on a company’s assets throughout their life cycle, a firm owner can improve their technique of acquiring and utilizing assets. A good case in point is Cisco Systems, which was able to reduce costs by executing PC asset management. When implementing such a strategy, the company discovered wasteful purchasing practices, which it solved by developing a better process for buying the equipment needed by workers.
2. Improving compliance
Government agencies, non-profit organizations, and companies are required to provide comprehensive reports on how they acquire, utilize, and dispose of assets. To ease the reporting process, a majority of them record their asset information in a central database. In such a way, when they need to compile the reports at the end of their financial year, they can easily access all the information they need.
Asset management is simply a system that helps companies keep track of all their assets, such as vehicles, equipment, and investments. Keeping tabs on the assets helps streamline operations, especially in relation to their sale or disposal. The process also minimizes the chance of recording ghost assets since all the available assets are well accounted for.
Thank you for reading CFI’s guide to asset management. CFI offers the Financial Modeling & Valuation Analyst (FMVA)® certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful: