Factoring in the upkeep of assets is critical to success – and underestimating the effort and cost could lead to significant repercussions.
Whether an asset is a vehicle, a piece of factory equipment, technology or even a piece of property, its maintenance requires analysis and forethought. If a business stretches itself too thin, by acquiring assets which rapidly depreciate or are too expensive to maintain, the purchase will impact the bottom line.
There are some steps that need to be taken to ensure that the maintenance or replacement of each asset falls in line with the financial growth of a business.
Identify the asset type
Business strategy expert Tom McKaskill says “businesses need to consider two main types of asset classes, and analyse which category their asset applies to.”
Assets can either be defined as ‘defined life’, which means they have a more immediate use or return on investment, and will likely depreciate in value within any given financial year. These could be cars, factory equipment or even technology. ‘Perpetual’ assets have a longer-term presence and slower depreciation such as buildings, land or roads.
Each type of asset contributes to a business’s revenue line in different ways, but both require maintenance or replacement at various intervals. McKaskill says it is vital to have a strategy for each type.
“Clearly you must have the objective clear for the asset. You have to think – how long do I want this piece of equipment? How do I want it to perform over a specific period of time? What is the maintenance required?”, he says.
If maintenance is the key, it is about keeping the item at the level to which you originally purchased it.
“For instance, this could include ordering new parts, maintaining it correctly, and performing whatever tasks are necessary to extend the useful life of the plant and equipment.
“If it’s a regular piece of plant and equipment that comes out of a stock line then it may have a preferred program of maintenance upkeep.
“That could require outsourcing the maintenance. If you have specialised equipment and don’t have in-house expertise, why not go to a maintenance company and get a quote for the ongoing maintenance of that piece of equipment?”
Know the potential tax benefits
Part of the process of obtaining an asset and planning for its costs is understanding the tax implications. Crowe Horwath’s national tax director Tristan Webb says there are some tax benefits which can be obtained for certain pieces of equipment.
“For example, with vehicles and asset financing, if you do a hire for purchase scheme, there is no GST on the interest component,” he says.
Businesses are generally aware of popular tax options when it comes to assets, such as the instant asset write-off provision. From 2014 businesses were only able to write off assets which cost less than $1,000, but the federal budget of May 2015 proposed to increase this amount to $20,000.
However, Webb says the tax benefits and liabilities differ very much depending on the equipment. Tax benefits for maintenance of a piece of land, for instance, will be very different to operating machinery or vehicles.
Understand the cost of idle equipment
In addition to tax, there are other financial considerations to keep in mind, McKaskill says.
“Businesses should calculate – before any piece of equipment is installed – what the actual cost of not using the equipment will be.
“When you have a vehicle, and one part goes bust, and it can’t be used – you need to think of the risk to the company of the equipment not being properly maintained,” he says. “The higher the risk, the higher the cost, and so you should be more willing to put effort into maintenance to prevent that from happening.”
That could mean having engineers on stand-by, or having a supply of parts on hand. It could even mean having a secondary piece of equipment as back up, he says.
Know when to upgrade
A major consideration with regard to asset maintenance is the upgrade cycle. At which point should a company move on to bigger and better equipment?
For engineering and manufacturing equipment, this process is long term. Upgrades could take a decade to occur, or more.
McKaskill says “businesses should identify the point at which they receive diminishing returns from their equipment. If a competitor is using new and upgraded equipment to get ahead, the business should consider moving ahead.”
However, technology expert and advisor Paul Wallbank also says “businesses need to be aware that upgrade cycles for certain pieces of equipment – specifically computing – are growing longer.”
A decade ago, businesses required new computer systems regularly to run native software applications, but software as a service and cloud-based apps now mean low-powered, cheap computers can run everything a business needs.
“The upgrade cycle is a lot longer now,” Wallbank says. “Businesses need to be aware of that and take that into consideration.”
In summary
Understanding the different asset types – defined life or pepetual – what you need them for, what financial return they will bring to a business, and how to factor in maintenance, are essential to getting the most out of assets throughout their lifecycle.
Consider the potential tax implications, costs to the business of idle assets and repairing them, and preparing for upgrades as assets come to the end of their best and cost effective use.
This post originally appeared in Business Focus.
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