Asset management is fundamental to the growth of a business. Properly managed, an asset portfolio can result in significant cost savings and a substantial increase in overall profits. Managed efficiently, the advantages include increases in efficiency and productivity that positions a company in a stronger position to maximize their return on investment as well as to meet future projections. However, asset management is not a simple art form or even an easy science. In fact, there are many components that need to be monitored and controlled in order for a managed asset portfolio to deliver superior results.
In this article, we will discuss the various components and concepts that need to be considered when assessing an asset portfolio’s long-term viability. For this purpose, we will take a look at asset type and classification, asset management systems, asset allocation, asset quality, asset longevity, and the impact of tax. We will identify the importance of cost-effective asset allocation, asset longevity, and the effect of taxes on an asset’s profitability. After discussing these important components in some detail, we will identify some cost-effective strategies for asset allocation and utilization. By the time you have finished reading this article, you will know how to keep your asset portfolio, cost-effective, and in good condition over the life-cycle.
All businesses face times of economic uncertainty. Whether they face long-term challenges or short-term challenges, the uncertainty can create a tension between capital budgeting and investing in the assets that provide the economic foundation upon which the business can thrive. The uncertainty surrounding any economic resource creates an environment that calls for a flexible and adaptive capacity. This ability to respond to changing economic conditions requires the proper selection, monitoring, and allocation of assets.
Long-term cost effective investments in fixed assets include machinery, property, and plant. These assets are not liquid and will not be replaced overnight. However, these long-term investments offer a solid foundation for a company during lean economic periods when revenues may fall. A firm’s long-term investments in fixed assets include cash flow arising from operating leases and advances.
Short-term investments in fixed assets include fixed assets held for day-to-day use. The value of these assets is determined according to the prices that would be paid to purchase them at the prevailing market price on the date of purchase. Examples of such assets include inventory and accounts receivable. A company should determine its short-term costs of ownership in an economic entity including its cost of doing business and its historical cost of capitalization.
All company costs must be measured and recorded in order to determine the value of the total company. The measurement of the costs of a firm consists of two basic parts: cost of doing business and cost of capitalization. By identifying and measuring current assets and liabilities, and comparing them to the sum of expected future disbursements, a company can determine its current assets and liabilities. A company’s cost of capitalization is also measured using the same two basic parts: current assets and liabilities. The difference between the two measurements is the investment value of the firm.
A company’s balance sheet is usually presented as a line itemized listing of the company’s financial assets and liabilities. The difference between the balance sheet and an asset and liability account is the difference between net worth and net book value. The net worth account includes the carrying and non-carrying balances of current assets, while the carrying account includes only those assets that are current liabilities. The book value account measures the value of an asset based on the discounted values of future cash flows.
Most businesses will prepare their balance sheet and presentation of their current assets and liabilities in the same way that they prepare their income statement. In preparing their balance sheet, the first step is to identify the core methodologies used by the company. The different methods of preparation are specified in the balance sheet standards adopted by the US GAAP (Generally Accepted Accounting Principles). Typically, most firms use the discount method where the discount rate is 10%. Other methods include the inventory turnover cycle method or the cost method, where the asset is replaced with a cost object and the old value is recognized as the expense rather than the asset.