Marrying Capital Expenditures to Asset Management
Many businesses are (finally) increasing capital expenditures, but those that fail to adhere to asset inventory best practices will pay a premium for doing so.
In a welcome sign of economic vitality, businesses throughout the U.S. are ramping up their capital expenditures. Capital expenditures rose 15% in the fourth quarter of 2014 according to Calcbench, with a concentration of industries announcing major investment plans for 2015 and beyond.
In the retail sector, Nordstrom recently announced its $1.2 billion plan for e-commerce and in-store technology, while Macy’s increased capital expenditures by $100 million to make room for store expansion. Transportation companies are making a strong CapEx showing as well. Union Pacific plans to increase capital expenditures by 4.8% to $4.3 billion in 2015, while American Airlines anticipates $6.2 billion in capital expenditures this year, including both aircraft and other investments. Even the finance and real estate sector appears to finally have regained its stride, increasing capital expenditures by 19% last year.
Firms must take special care in ensuring that today’s investments don’t become tomorrow’s expenses. Poor asset management habits can easily translate into over-taxation or regulatory noncompliance, especially with regard to the Sarbanes-Oxley Act. According to global market intelligence firm, IDC, organizations that practice active asset management benefit from a 15% lower total cost of ownership, with up to 160% savings in procurement alone. Regardless of industry, your firm can significantly reduce fixed asset-associated costs — particularly if you’ve been focused on capital investments — by adopting smart inventory strategies and implementing a fixed asset solution.
Taking Stock of Asset Management Challenges
Properly tracking your firm’s fixed assets may be a tedious exercise, but it's absolutely critical to complying with the Sarbanes-Oxley Act and other regulations. Both the purchase and sale of fixed assets must be recorded and retained for auditing purposes, a task that becomes increasingly complex when businesses manage a diverse collection of assets.
Keeping tabs on a single asset type is relatively straightforward, but few organizations get off that easy. When a firm's assets are as varied and abstract as commercial airliners or software licenses, quickly finding status information or other details for a particular resource is a cumbersome, imprecise task. According to a recent Bloomberg Tax study, these obstacles create dire circumstances from an audit perspective. Nearly 40% of U.S. corporate tax and accounting professionals feel that auditor scrutiny around capital assets has increased, forcing an end to the days of relatively loose asset accounting standards.
Implementing a sound asset management strategy goes beyond avoiding regulatory noncompliance; it can be a strategic way to uncover substantial savings. Firms with poorly defined assets often over-purchase and over-report, resulting in wasted resources and unnecessary taxation. Many organizations – including those that recently endured corporate reorganization, mergers, or acquisitions – have a poor grasp on how and where their assets are being employed, falsely assuming that every resource is in use. On the other hand, firms do not always track when assets have been discarded, or otherwise stop providing business value.
These sloppy practices lead organizations to invest in assets they no longer need and pay tax on those ghost assets they can't locate. Worse, these expenses scale with investment. Organizations seeking to grow their capital expenditures without an asset management strategy will struggle to justify their purchases and achieve meaningful ROI.
Adopting a More Structured Approach
Taking the leap from Excel-driven asset management to a fully integrated system is not difficult, but does require thorough planning. Above all else, the transition demands close collaboration between procurement, IT, accounting, and tax departments to ensure the asset management solution and new process meets the needs of all involved parties. Building a successful fixed asset inventory management program hinges on a few key steps:
- Clean up your data: Organizations must first review previously collected data to determine the recorded number, value, and type of assets before transitioning to a new system. In this early phase, business leaders should research and ultimately select a fixed asset solution that serves all stakeholders' needs. For example, look for a tool that accommodates asset repair tracking, a critical function for both book and tax accounting.
- Equip your assets: After an asset management platform has been chosen and implemented, businesses should conduct a physical asset inventory. This might involve tagging resources with digital reference codes or Wi-Fi enabled sensors that communicate back to the new software.
- Analyze and reconcile your information: Once asset data is loaded into the system, firms can compare recorded and actual resources in order to excise ghost assets or account for any unreported inventory. The results are often surprising; Gartner reports that nearly three-quarters of organizations have a 30% discrepancy between their planned and actual inventory.
Long after migrating to more strategic asset management procedures, businesses continue to benefit from accurate inventory records. By eliminating the gap between reported and held assets, organizations can minimize their tax burden, put a stop to wasteful spending, and protect their latest capital investments.
To learn more about how your firm can benefit from a comprehensive fixed asset solution, download our Asset Inventory Best Practices whitepaper.