Assets and inventory are capital intensive, and so it’s important to ensure they’re being optimally utilized. If something is costing you a lot of money, you need to make sure you’re getting your money’s worth.
This brings us to two important questions:
- How can organizations define “optimally utilized”?
- If assets and inventory are not being optimally utilized, what can organizations do to improve?
Fixed assets matter because it is important to account for not just the initial investment that goes into an asset but also the total cost of ownership.
Let’s address the first question with just three simple words: asset turnover ratio.
1. What is asset turnover ratio
Asset turnover ratio measures the value of a company’s sales or revenues relative to the value of its fixed assets. The asset turnover ratio shows how efficiently a company is using its assets to generate revenue. The higher the ratio, the healthier the company.
To put it simply,
Asset Turnover = Total Sales / Average Net Fixed Assets
For example, if a company has had $50,000 in sales and has $250,000 worth of fixed assets, the asset turnover ratio is 0.2. That means $0.2 of sales is generated for every dollar invested in fixed assets. The metrics vary by industry since, for example, a bank has far fewer fixed assets than a company that owns a fleet of cement trucks.
2. How to calculate your asset turnover ratio
Here’s how to get started:
- Begin measuring your asset turnover ratio if you aren’t already. Use the formula in the previous section to calculate asset turnover ratio for the past six months, to get a sense of trends.
- Once you have a sense of your organization’s asset turnover ratio, look at other players in the industry and your direct competition to see how you’re performing in comparison.
- Once you’re done carrying out an as-is, keep track of any changes in your fixed asset ratio. This can help determine if you’re over-invested in your assets or if you need to invest more to grow.
So, to answer the question “How can I define optimally utilized?”, look at your organization’s asset turnover ratio.
But calculating the asset turnover ratio is only the first step here. Once you’ve determined how you’re fairing, the next step is to begin the work of improving it, especially if you discover your asset turnover ratio is too low.
What can you do to improve? Let’s look at some answers.
3. How to Reduce Asset Costs
Unfortunately, asset-intensive companies don’t always see a high asset turnover ratio as downtime is almost inevitable. However, there are ways to optimize the way assets are being managed to prolong their useful life. Reducing asset costs doesn’t have to mean adversely affecting quality and efficiency. Reducing asset costs can go hand in hand with improving both quality and efficiency.
This is where maintenance management comes into play. Maintenance management allows organizations to track and update all inventory and assets to ensure everything is going smoothly. However, one of the biggest factors to consider with maintenance management is how it’s being carried out. If you’re still using paper, spreadsheets, or basically any manual methods of logging data, chances are good that both quality and efficiency are being adversely impacted.
Here’s why.
Labor Intensive
Filling in data manually distracts maintenance professionals from focusing on what you really need them to be doing. They’re focused on paperwork instead of assets.
Error-Prone
Roughly 88% of spreadsheets contain errors. And even the smallest error could cost millions of dollars in losses.