Five Facts Every CFO Should Know About Asset Management

The relationship between a company’s long-term financial plan and its strategic plan is generally well understood. But what about its relationship with the long-term asset management plan—and more importantly, does your company even have one? Asset management and a company’s performance are intrinsically linked. In this article, we highlight five facts CFOs need to know about physical asset management in relation to a company’s financial health:

1. Good asset management practices can add up to 30% to your profits

Fixed assets generate income for a business, but they could also cost you money if not operating optimally. Poor asset management can quickly drain a budget through equipment downtime, costly repairs, and missed production targets.

On the other hand, we’ve found that regular scheduled maintenance can extend an asset’s lifespan up to three times longer than if it were neglected. This can have a significantly positive effect on your financial results—adding up to 30% to your company’s production capacity and/or profits.

2. Good asset management helps accurately forecast Capex and Opex

Proper asset management provides a company with insight into its assets—and that’s a powerful tool. Helping clients fully understand their assets is one of the first things we do.

You need to know what assets you have, their condition, how they’re performing, how much they cost to maintain, and what their remaining lifespan is. With this information, it becomes easy to determine how much operating expenditure (Opex) should be budgeted to keep the assets in good condition and fully operational. You can also forecast when capital expenditure (Capex) will be required to replace an asset—either when it reaches the end of its useful life (cost vs. benefit) or when it needs upgrading with new technology (see point 3 below).

Part of understanding assets includes knowing which are critical to the business—and why. Historically, this was left to the operations team, while the finance team focused on financial reporting and compliance.

Today, CFOs can more confidently lead a company toward long-term financial strength by having the same level of knowledge about critical assets as others in the business—and using that knowledge in financial planning and forecasting. As a bonus, financial reporting, depreciation figures, and residual values become more accurate as the CFO’s understanding of assets improves.

3. Advances in smart technology can add financial value

One of the things we’re excited about at Pragma is the Fourth Industrial Revolution (Industry 4.0), which is taking asset management to a whole new level. Technologies that alert you when a part needs to be replaced, or warn you of imminent failures, offer tremendous advantages.

The more automated the process, the greater the inherent discipline and the lower the likelihood of human interference and error. Capitalizing on the efficiencies and effectiveness offered by technological advancements is a crucial part of staying competitive today.

Naturally, acquiring these technologies requires some upfront capital investment—but it can be planned. Phasing out older assets and replacing them with sensor-driven smart technology adds value to your operations. Smart equipment that provides insights and superior performance will be more valuable to your company than continuing to spend on old machines that don’t deliver critical data.

4. It’s not just about profits

Asset management and a company’s triple bottom line are great partners. When measuring the total cost of doing business—not just financially, but also socially and environmentally—a solid asset management plan delivers in all three areas.

Take this example: in 2018, a transformer exploded at a local warehouse. One person died, and several others were injured. The cost of this catastrophic asset failure went far beyond financial—it affected people, families, and the environment. More and more, society expects companies to be socially responsible, and those that lead by example will earn customer preference.

Effective asset management benefits the triple bottom line: the company’s profits, the people it employs, the community it operates in, and the environment.

5. Asset management could reduce insurance premiums

This is something to discuss with your insurers. If you maintain your assets using best practices, will your insurance company offer you lower premiums? There may be savings available here—it’s worth finding out!

Your move

One of the biggest challenges organizations face is siloed thinking and poor communication between professional disciplines. But if everyone commits to the asset management plan, that creates a common ground that can drive organizational cohesion.

A proactive, informed CFO is uniquely positioned to champion the long-term asset management plan and keep it updated. The benefits will go far beyond the numbers.