Optimize Your Fixed Assets

Whether it’s Quaker churning out oats, Toyota building cars, or your friend making jewelry to sell on Etsy, manufacturers of all sizes must invest in fixed assets to produce and distribute their products.

Quaker buys machines that process raw oats to edible snacks, box it and load it into trucks. Toyota oversees robotic assembly lines warehouses. Your friend purchases a computer to sell her jewelry online – and perhaps a bead kit?

These types of investments are essential to manufacturing, distributing and selling a product that is expected to make a profit. A company owns these tangible assets, so they will be kept to make sure production is running smoothly.

They are fixed assets, also known as long-lived assets, tangible assets or property, plant and equipment, are a term used in accounting for assets and property that cannot easily be converted into cash. Fixed assets are different from current assets, such as cash or bank accounts, because the latter are liquid assets. 

These assets usually an expensive up-front investment, depreciate over time, and can be found on a balance sheet as property, plant, and equipment (PP&E).

Maintaining Fixed Assets

As with any capital investment, it is in the owner’s best interest to maintain the asset, which makes it even more expensive.

Any fixed asset purchase needs to take into account not only the initial investment but also the upkeep expense. The cost of keeping an asset operating at its current capacity and in its present condition (routine maintenance) combined with the cost of repairing a malfunctioning asset to its previous operational condition (reactive maintenance) make up the two major maintenance costs related to fixed assets.

It’s always less expensive to maintain an asset than it is to fix once it’s broken. Consistently performing preventive maintenance on fixed assets usually avoids expensive repairs and minimizes the risk that production might be interrupted. When all machines are operating at peak performance, more products are produced, and more revenue is generated for the company.

If a company wants to increase its return on investment, it should place a high priority on maintaining its fixed assets.  Routine maintenance positively affects two distinct metrics of company health: Return on Fixed Assets (RoFA) and Fixed Asset Turnover Ratio (FATR).

How to Calculate Return on Fixed Assets (RoFA)

RoFA can be calculated by dividing a company’s current operational income with the investment cost of its fixed assets.

So, if a business earns $10 million and owns $100 million of fixed assets, it’s RoFA would be .1, or 10%. This can also be looked at as: for every dollar of debt and equity spent, this company sees a 10 cent return in net profit.

RoFA ratios from different periods can be compared to gain a sense of the company’s profitability direction. It can also be compared to competitors. 

Exploring Fixed Asset Turnover Ratio (FATR)

Fixed Asset Turnover Ratio, a calculation used by manufacturers that typically purchase more PP&E to increase output, is a metric to assess a company’s operating performance.

It’s a ratio of net sales to fixed assets. So, FATR measures a company’s ability to generate net sales from PP&E investments. Like RoFA, higher FATR means that a company has more effectively utilized investment in fixed assets to generate revenue.

There is no ideal ratio or benchmark for FATR. It’s an indicator of a company’s profitability. If a company has a higher FATR than its market rivals, that company can be confident it’s using fixed assets to generate sales better than its competitors.

CMMS in Maintenance Management of Assets

So, where does maintenance management enter the picture?

Let’s begin with its purpose.

Maintenance management is all about maintaining the fixed assets and other resources in top shape so that production continues without interruption and that no money is lost on avoidable downtime or other disruptions.

Its goals are to control costs, schedule works orders efficiently, and ensure regulatory compliance and safety standards.

And while a great maintenance manager can schedule fixed asset repairs in order of priority and promptly allocate resources to the most critical upkeep demands, he or she is only human. Errors in commission and omission will occur. Maintenance schedules will be forgotten. Parts misplaced or unordered. Fixed assets will fail. Production disruptions will erupt. Heads will roll?

Even the most ardent maintenance manager should retire the maintenance log of yesterday and replace it with a modern CMMS.  

Why? Isn’t buying a CMMS just another fixed asset investment? And can’t computer programs fail to run or otherwise break down? And doesn’t learning to use the system require some sort of learning curve? A maintenance log isn’t – and doesn’t.

So, it’s “Yes” – to all questions; but consider that the strength and assurance of any CMMS lay in the database built from every facet of an organization’s maintenance operation (e.g., maintenance schedules for all machines, record of storerooms containing the needed spare parts).

This database not only eclipses human capabilities but its three core functions positively affect RoFA and FATR. So, to a maintenance manager’s (and company’s) benefit, a CMMS:

Records and tracks completed and assigned maintenance tasks in a timely and cost-effective manner.

Digital tracking and recording of a maintenance schedule automate alerts, warnings, and other notifications to keep abreast of routine, preventative maintenance, lessening the threat of mechanical failure taking production offline and disrupting sales.

Helps management make informed, strategic decisions. 

Aggregated operational statistics let management calculate and compare production performance from which strategic decisions can be made to better allocate resources. The upshot? Improved operational efficiency. Lowered production costs. More manufactured products ready for distribution and sales.

Verifies regulatory compliance. 

If a company is out of compliance, production disruptions can arise as regulators could impede operations. CMMS records and correlates operational compliance, verifying that regulations have been met or notifying management if compliance is lacking.

So how do I start?

These days, to properly manage facility maintenance in terms of profitability, huge amounts of data are required. Manually compiling this data demands tremendous amounts of effort and time that exceed the limits and capabilities of any maintenance manager.

So, retire the pen and paper method and adopt a CMMS. Stay ahead of your maintenance management and let it take your manufacturing to better performance, higher output, and more profitability.

Then, watch your RoFA and FATR grow.

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