Reprinted from Sage official website Sage UK - Software & Solutions for Every Business
In any business you can see a professional space filled with computers, desks, chairs and filing cabinets.
Although they are inconspicuous to ordinary people, they have a professional title in finance. They are called fixed assets.
What we cover in this article include:
- What is fixed depreciation?
- Challenges in Calculating Fixed Asset Depreciation
- How inaccurate fixed asset depreciation leads to excess expenses
- How to get back on track and save money
- Final Thoughts on Fixed Asset Depreciation
What is fixed depreciation?
Fixed asset depreciation is the process of tracking the life cycle of fixed assets and reporting their value for insurance and tax purposes.
This is one of the most important financial processes in any business or organization.
However, many companies struggle to accurately record and report their fixed assets and therefore overpay insurance premiums and taxes.
Challenges in Calculating Fixed Asset Depreciation
Fixed assets are a key driver of business growth.
Regardless of the industry, any organization needs computers, copiers, desks, and office equipment in order to thrive and do what it does best. However, all of these assets need to be tracked and depreciated according to complex schedules.
Depending on the asset involved and the rules and regulations that apply to that asset, an individual asset may be depreciated according to a specific schedule or a specific method.
If a company doesn't know with certainty what fixed assets are on its books (which is the basis for calculating fixed asset depreciation), it can quickly face a complex and time-consuming problem.
For example, it is not uncommon for businesses to use spreadsheets to manage their fixed asset inventory and depreciation schedules, to conduct informal and ad-hoc surveys of fixed assets in order to update their records when employees have time. This can lead to gaps in record keeping, quickly spiraling inventory out of control.
Tracking and depreciating fixed assets can be challenging when finance teams are often busy preparing higher-priority budget materials and annual audits.
In some cases, finance personnel may have to work with other parts of the organization, such as the IT department or regional offices, which may have fixed asset records that they manage themselves. The process of coordinating multiple sets of records can place additional administrative burden on all involved.
This approach to managing fixed assets, while commonplace, can prove expensive in terms of staff time and capital.
First, manually managing fixed assets in this way consumes a lot of staff time that could be better invested elsewhere. In fact, it’s one of the most common productivity drains plaguing growing businesses.
Second, companies can continue to overpay property taxes and the insurance costs associated with them if assets that are no longer in use are not properly disposed of in the accounting records.
How inaccurate fixed asset depreciation leads to excess expenses
So, how much does inefficient fixed assets processes cost an organization?
On average, companies overpay in taxes and insurance on about 12% of the fixed assets on their books.
Even errors in calculating the amount of depreciation can result in overpayments, since insurance premiums are usually based on a percentage of the total current value of a fixed asset. Businesses could end up missing out on deductions they would otherwise be entitled to. Ultimately, companies may be saddled with a higher total cost of ownership (TCO) for fixed assets than necessary.
As a result, an inefficient process for depreciating fixed assets could cause the company to waste capital that could be invested wisely to help the business grow. The opportunity costs involved in managing fixed assets in this way go beyond financial costs. Soft costs also arise related to staff time and efficiency.
When financial professionals get bogged down trying to sort out whether particular assets still exist in the company and whether they are being depreciated correctly, they have to spend time on this task that they could otherwise devote to higher-value projects for the company, such as securing more Good GDPR compliance or providing strategic financial analysis to executive leadership.
On top of that, the lack of a robust approach to fixed asset management can even call into question the accuracy of financial reporting, a headache no finance team needs or wants.
In fact, assets that are not closely tracked can be lost or simply stolen, consuming additional staff time and costing the company more money when those assets must be replaced.
After encountering these challenges, many companies are beginning to explore ways to get back on track so they can save time and money.
How to get back on track and save money
Fortunately, there is an easier, less expensive way to manage fixed assets. Fixed asset management software allows organizations to maintain a healthy fixed asset register and fully insure their assets.
Doing so also saves employees time, allowing the finance team to focus its expertise and talent on projects of greater value to the company.
Here are three ways to get back on track, accurately manage fixed assets, and only pay for the assets your company uses:
1. Create a complete inventory
It is not difficult to generate a complete inventory of the fixed assets a company has on hand.
Using a barcode reader, you can take a complete inventory (or multiple locations, if any) of your fixed assets and automatically reconcile all of these records in one central location.
Eliminating silos in this way eliminates duplicate data entry, saving staff time and eliminating headaches.
2. Simplify the fixed asset life cycle
Once you know what fixed assets you own, then comes the fun part: figuring out which depreciation methods apply to each, and determining how best to manage their lifecycle, from acquisition to disposal.
Sage X3’s Fixed Asset Management can come into play here, assisting with everything from depreciation calculations and cost allocations to year-end financials. It can even digitally store images of critical asset records, providing a single point of reference for every asset an organization owns.
In this way, instead of passively chasing fixed asset information, companies can proactively plan their future investments and better maximize their ROI.
3. Continuously update software management
Spreadsheets, while useful in many ways, can only get your company so far when it comes to managing fixed assets.
With software management for fixed assets, you can give your company greater visibility into its fixed assets, minimizing its total cost of ownership while streamlining operational and financial workflows.
Final Thoughts on Fixed Asset Depreciation
Fixed assets may seem complex at first glance.
After all, they may be subject to multiple rules, regulations, and depreciation methods, while being physically located in broad regional locations, such as various subsidiaries and factories under the group company, so it is difficult to focus.
However, there is a better way to manage them that can ensure cost savings for the company and increased productivity for everyone involved.
With software that simplifies the process of tracking and depreciating fixed assets at a time when labor costs remain high, they can simply become an essential part of a well-run organization, enabling its growth rather than hindering its progress.