In our previous Actionable Insights blog, we discussed the Operating Expenses Action Center. Next, we will provide an overview of the Fixed Assets Action Center as well as the associated key performance indicators (KPIs).
Fixed assets include land, buildings, or machinery and equipment that will have a long useful life. Unlike current assets such as receivables, companies don’t expect to turn fixed assets into cash in the short term—not for at least a year, and usually longer.
Companies use fixed assets in the business, but they are not consumed or sold during the normal course of business. All fixed assets except land do, however, have a finite life, and companies can deduct a portion of the asset’s value as a depreciation expense over the course of the asset’s useful life. This helps to reduce the value of the asset on the balance sheet as its value to the organization declines. The company reports depreciation as a debit to depreciation expense and a credit to accumulated depreciation to reflect the asset’s remaining value to the organization on the balance sheet, and to accurately reflect the costs on the income statement.
KPIs on the Fixed Assets Action Center
QAD Action Centers provide analytics to help both managers and users monitor metrics and KPIs. KPI highlights for the Fixed Assets Action Center include:
Asset Cost by Class
This shows the cost of all assets, segregated by asset class. It shows the current year and a prior year, allowing the user to monitor trends in the organization’s asset investments or write-offs. While classes reflect the large categories of fixed assets like land, buildings, plant equipment and office equipment, they also distinguish the sub-categories that determine the useful life and depreciation of GL accounts. For example, “laptops and PCs” are a separate class in the office equipment category.
Net Book Value by Class
This graph shows the net book value of assets by class for the current and prior year. (Net book value is the asset value remaining after depreciation.) This allows the user to monitor trends in asset values.
Acquisition by Class
By showing the acquisition of new assets acquired during the period by class for the current and prior year, this visual allows users to see the investment in each asset class over time to ensure that investments are in line with company strategy.
Accumulated Depreciation by Class
By showing the accumulated depreciation by asset class for the current and prior year, this visual allows users to track trends in depreciation. While a company may want to show a substantial asset value on the balance sheet, monitoring the accumulated depreciation can ensure they don’t overstate the asset value, thereby inflating the company’s value. For the same reason, depreciating assets too quickly may understate the company’s value or cause problems with tax authorities.
YTD Depreciation by Class
By showing year-to-date (YTD) depreciation by asset class for the current and prior year, users can see trends in accumulated depreciation and use the information for projecting the effect of depreciation on the balance sheet and income statement.
Retirements by Class
Except land, every asset has a useful life, and eventually the company will want to retire the asset. The asset does not have to be completely depreciated to be retired. For example, the company may buy a more modern machine to replace an existing piece of equipment and dispose of the old one by selling or scrapping it. If this happens, the company must write off any remaining asset value for the old machine. If the asset has been fully depreciated, adding a new machine has no effect on the old machine’s value. A company is not required to get rid of a fully depreciated asset. They can continue to use it without any issue, as long as they no longer book depreciation or show it as an asset on the balance sheet.
The Importance of the Fixed Assets Action Center
A company’s fixed assets make up a substantial portion of the value of the company on its balance sheet. This is especially true in the manufacturing industry, where plants and their equipment require continuous investments. And with the robotization of that equipment also comes a greater cost.
Monitoring fixed asset value and depreciation is imperative to ensure that a company states assets and expenses accurately, and effective fixed asset management contributes to profitability. Since there are many depreciation methods that a company can use to calculate depreciation on an asset, having a clear picture of the existing asset status can help the finance team choose the optimum method of calculating depreciation to balance the asset’s lifespan against the effect on the balance sheet and income statement. Along with QAD Fixed Assets, the Fixed Asset Action Center is a valuable tool for any company with significant value in its fixed assets.
Which KPIs and metrics are most important to your organization? Learn more about QAD’s predefined Action Centers as well as best practices for each.