Understanding Fixed Assets: A Strategic Approach for Business Growth
- CRI Simple Numbers
- Aug 4
- 2 min read
Fixed assets are crucial to any business's financial health and operational efficiency. Yet, many business owners and financial decision-makers often overlook the strategic importance of managing these assets effectively. In the latest episode of the Profitability Playbook: The Simple Numbers Podcast, Brandon Gray and Mike Maxson dive into the fundamentals of fixed assets, what they are, why they matter, and how to approach them for sustainable growth.
What Are Fixed Assets?
Fixed assets are long-term tangible assets that a business uses over several years. Unlike everyday supplies or small tools, fixed assets include significant investments such as buildings, machinery, vehicles, and equipment. These assets appear on your balance sheet and are depreciated over their useful life rather than expensed immediately. For example, a service truck costing $70,000 is depreciated over several years to better reflect its use in generating revenue.
Why Managing Fixed Assets Matters
Proper management of fixed assets helps businesses maintain accurate financial records, comply with tax regulations, and make informed investment decisions. Having a clear capitalization policy, defining thresholds for when an asset should be capitalized versus expensed, is critical to ensuring consistent accounting treatment.
Replacement vs. Investment
Fixed assets generally fall into two categories:
Necessary Replacements: These are assets you need to replace due to wear and tear, such as a broken vehicle or outdated equipment. Speed and functionality are key; you need reliable assets to keep operations running smoothly.
Growth Investments are assets purchased to enhance capacity, increase efficiency, or improve output. Upgrading to automated machinery may reduce labor costs and increase production, but requires careful analysis of the return on investment (ROI).
The podcast discusses the importance of evaluating whether a new asset will deliver at least a 50% ROI over its useful life. This approach helps avoid costly mistakes and ensures your investments drive tangible business benefits.
Financing and Purchasing Decisions
Should you buy new or used equipment? Lease or purchase outright? Financing terms should ideally match the useful life of the asset to avoid cash flow challenges. For example, financing a piece of equipment with a 10-year life over only five years can strain your cash flow.
We also explore the realities of custom or specialized equipment, which may require troubleshooting and longer lead times before delivering value. Understanding these nuances can help businesses better plan their fixed asset purchases and financing.
Are you ready to explore further?
This episode of the Profitability Playbook offers a comprehensive look at fixed assets from seasoned professionals Mike Maxson and Brandon Gray. They share real-world examples, practical advice, and key accounting insights to help you make smarter financial decisions.
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