What is Capital Asset Management? (Definition and Explanation)

Capital assets are the backbone of a business. These assets provide financial strength and opportunities to generate revenues. Capital asset management is critical for any business. It helps a business stay competitive and reduce its asset maintenance costs. That in turn can improve operational efficiency and profits of the business.

Let us discuss some key aspects of capital asset management.

Capital Asset – Definition

A capital asset refers to an asset of a business that has a useful life of over one year and that is not held for sale by the business. Capital assets held by a business help in generating profits. However, these assets may or may not be directly involved in profit-generating activities.

Common examples of capital assets include:

  • Property, Plant, and Equipment
  • Vehicles such as trucks, vans, cars, etc.
  • Manufacturing or production machinery
  • Office equipment such as computers, printers, scanners, etc.

Classification of assets into capital and current assets depends on the useful life and cost criteria. A capital asset has a useful life of over one year. Also, most regulatory and accounting standards set a threshold amount for the classification of capital assets.

It is important to note that capital assets can be intangible as well. A business may own significant intangible assets such as patents, trademarks, and copyrights as well.

What is Capital Asset Management?

Capital asset management refers to the process of developing, maintaining, and selling capital assets. The objective of this process is to perform these tasks in a cost-effective and timely manner.

Capital assets require substantial initial investments. A business may purchase capital assets with borrowed money as well. These assets provide financial strength to a business. Thus, the management of capital assets is critical for the success of any business.

Capital asset management helps a business in managing maintenance costs of assets. A business can track the value and usefulness of capital assets. The process also helps businesses in managing the total costs of capital assets.

See also  Bond Vs. Debentures - 6 Key Differences

Another key aspect of capital asset management is cost recovery. A business can compare total costs incurred including interest payments, maintenance costs, and compare them against benefits received. Let us discuss what is a capital asset framework that can help a business in managing these assets.

Capital Asset Management Framework

A business can build any framework for its fixed and capital asset management. These steps include some valuable starting points for any business with large tangible assets.

Evaluate Current State of Capital Assets

The first step is to account for all capital assets owned by a business. A business must evaluate the current state of these assets objectively.

A fair evaluation of the state of capital assets will help a business in planning. It can help in some key decisions such as acquisition, maintenance, and disposal of capital assets over time.

Evaluate Critical Assets for Business

Capital assets require substantial investments and resources. They provide financial stability and help businesses generate revenue. Thus, all capital assets are critical for a business.

Further, a business may classify some critical factors that may affect some capital assets more than others. It will help businesses in prioritizing the capital asset management process.

Analyze the Maintenance Requirements

A capital asset comes with long useful life. However, it incurs substantial maintenance costs as well. Thus, the allocation of the maintenance budget is important.

Analysis of maintenance requirements can help a business in deciding between disposal and acquisition decisions for these assets. It can have a significant impact on the cash flows and profits of a business in the long run.

Lifecycle Costs

Lifecycle costs include purchase, maintenance, operating costs, and disposal costs of a capital asset. One of the key points in developing an effective asset management framework is to analyze the lifecycle costs of assets correctly. Analysis of lifecycle costs is important to evaluate the acquisition and disposal of assets as well as financing costs.

See also  Permanent Fund - Definition, Example, And How does Permanent Fund work?

Financing Capital Assets

Capital assets require equity and debt financing. Both forms of capital come with different costs and benefits. Usually, a business requires debt financing to fund its capital asset acquisitions.

Conversely, a business also uses capital assets as collateral to acquire debt financing. Thus, both these aspects of capital asset management are interlinked.

Why Businesses Need Capital Asset Management?

A business can improve the useful life of a fixed asset with good management. Thus, if a business owns large capital assets, it is critical to developing an effective asset management plan.

A comprehensive and effective asset management plan ensures smooth operations for a business. The business can maximize the utility of these assets and profits.

Without an effective asset management plan, a business may face several issues. For example, a business may face lost inventory or equipment.

Similarly, sudden downtimes, failure of machinery, loss of equipment, and lower operational efficiency are a few key areas of concern for a business.

A business can also risk environmental and safety risks without careful asset management. For instance, abandoning sensitive equipment and production facilities without proper disposal measures can create an environmental hazard issue.

Development and Implementation of Capital Asset Management Plan

Developing an effective capital asset management plan is the first important step. However, a business must adopt a holistic approach in developing and implementation the plan.

A few key steps in this aspect can be listed here.

  • Analyze the current state of assets thoroughly.
  • Evaluate the lifecycle costs of capital assets.
  • Review the maintenance costs of capital assets including disposal and replacement costs.
  • Compare the acquisition and replacement costs of capital assets.
  • Implement the asset management plan comprehensively.
  • Conduct regular reviews and monitor the progress of the action plan.
  • Make changes and adjust wherever needed to make the plan successful.
  • A business should take corrective actions regularly to keep the asset management plan effective.
See also  Leased Asset – Types, Accounting Treatment, And More

Lastly, a business may adopt industry benchmarks and historic trend analysis to compare the performance and utility of capital assets.

Importance of Capital Asset Management

A comprehensive capital asset management plan is important for a business for several reasons.

Accounting for Assets

Capital asset management requires accounting for all capital assets. It means the plan helps a business to identify the usage and locations of these assets. It can also ensure the assets provide maximum utility and are maintained accordingly.

Depreciation and Amortization

A business needs to allocate depreciation and amortization expenses to its tangible and intangible fixed assets. An effective asset management plan will consider the allocation of these expenses with accurate estimates for the useful life and residual values of these assets.

Risk Management

Another key factor is risk management when it comes to asset management planning. Risk management includes financial risks, operating risks, and compliance risks.

For example, a business should know its costs of capital asset acquisition as compared to its competitors. Similarly, compliance with financial and environmental laws with the acquisition and disposal of capital assets is important.

Valuation of Assets

For depreciation charges and otherwise, a business always requires an up-to-date and accurate valuation of capital assets. In practice, no asset management plan can work without accurate asset valuations as well.

Benefits of Capital Asset Management

If a business can implement the capital asset management plan effectively, it can offer several benefits to a business.

  • A business can develop an efficient asset acquisition and maintenance system.
  • A business can reduce maintenance costs, prolong asset life, and create more value with capital assets.
  • Efficient use of capital assets and effective planning increases the competitiveness of a business.
  • It helps a business in risk planning and management processes.
  • A business can follow compliance guidelines with asset management planning.