As you know from previous blogs, I love to spend most of my time in business focusing on revenue generation, which is what really excites me. Other areas close to my heart are my tax liability and the value of my business. Asset management has a direct impact on both of these areas. So, even though it may not be the most stimulating of subjects, it is still very relevant to growth and profit.
The Wikipedia definition is long winded and so complicated it would make any normal business owner run for the hills. My main aim of this blog is to give you simple,but useful,tips and advice on effective asset management so you understand how to do it in your business.
Let’s start with the basics: What is asset management?
In simple terms asset management is what it says on the tin, the management of those assets which impact the company’s value and taxable liability.
As this subject is finance related, the owner will normally leave the company accountant to deal with this matter in a small to medium business. It is much more likely thatin a larger business the owner will be more hands on and work alongside the Financial Controller in asset management for growth or sale reasons.
To define what an asset is,we need to break them into two categories:
- Tangible Assets – These are things that you can touch, for example buildings, cars, computers, machinery, furniture etc.
- Intangible Assets – These are things that you can’t touch that have a value for example, goodwill of a business, research and development or intellectual property and investments (shares)
How does it affect your company?
The awareness and relevance of asset management really does depend on what the company provides. As I run a service based business and lease my office, I have mainly tangibleassetswhich are ICT related or cars. Neither adds much to the overall value of my business.
A manufacturing company would have a greater need for asset management, as this would have a massive impact on the overall value of a business and tax liability.
A holiday park or company who own a large volume of property may have full time asset manager in house as the majority of the company’s value will be tied up in the assets.
A company who has a high value of money invested in shares should have a totally focused approach to asset management as poor management quickly creates a high risk.
Key areas where asset management impacts a business
Listed below are the key areas in which asset management impacts a business:
- The added value of the assets to the company
- The annual depreciation of the assets
- The tax benefit or negative any depreciation of assets has to a company’s corporation tax liability
- The maintenance and up keep of all tangible assets through repair and renewals.
- The Importance of asset management
On the whole, any investment made in assets will usually be considerable and will have a level of consideration. It is crucial for any business to have a full asset inventory register to keep control of what the staff or company has, especially with field based staff.
As all tangible assets purchased will have had capital invested into them, it is important that further management, awareness and investment are planned for. This is to ensure they are kept in good working order so their value does not fall by more than the amount prescribed with ‘normal’ depreciation.
In my opinion management of intangible assets, it is less obvious but massively more important as they present a higher risk when left unmanaged. Controlling the commercial value of shares or IP rights is high risk and should be fully managed by experienced staff.
Investment management is a huge part of asset management
Investment management is a huge part of managing intangible assets. This is more applicable for businesses that own share portfoliosor manage portfolios as their core business profession. This form of asset management has a high level of risk because it relies on market forces. My one piece of advice here is to engage with a professional organisation that fully understands how to manage portfoliosbecause a company’s value could be drastically reduced as a result of poor management.
HP vs. Lease vs. Cash purchase and the implications on asset management
An area which needs to be discussed is the benefit and cost of the investment in tangible assets. Assets require capital investment and capital investment requires cash. In the current economy not many companies have a healthy cash flow for investments in assets,and there are many alternatives that need to be considered in relation to hire purchasing or leasing. If cash flow is poor the decision is already made but if the company can afford to invest, it is then down to the owner’s opinion. I have given two examples of this for a company car. Is it more beneficial for a company to buy a car, or lease one?
- The first opinion is of an owner who likes to have tangible assets and would invest in a car. The positive to this is they get something for their money and at the end, even if it has been depreciated down to £0, they still have an asset they could sell which would give a return on the investment made.
- The second opinion (which is my own personal decision) is to lease the car. By leasing a fully maintained car, I pay a fixed fee per month and therefore have a fixed cost which is better for cost management. This cost is deducted from my profit, so my tax liability is less. At the end of the contract I hand back the car.
Patent and Intellectual property
Intangible assets within a business areoften the most unrecognised. If a business owns patents or Intellectual property rightsthey must see these as an asset that adds to the value of the business. In this case they should be valued, protected and managed as they add to the company’s value.
In summary, asset management is an important fact of business,but it is also a large part of what you pay your accountant to do!