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Fixed Assets - « back to Articles

Assets your business needs to enable you to produce your goods and services which, in turn, generate sales are called Fixed Assets. Fixed assets like your land, buildings, vehicles, machinery, and equipment do not produce sales on their own but you manage them and thus contribute to profit.

Managing fixed assets is done to keep the fixed expenses associated with them like interest and depreciation under control; assisting you keeping your selling prices competitive.

Fixed Versus Current Assets

Fixed assets differ from current assets in two important ways:
  • they are not for sale and remain in the business for longer than a year
  • they do not consumed in the production process
  • they do lose a portion of their usefulness (depreciate) over time
Fixed assets like current assets are normally found on the left side of your balance sheet. They are listed below current assets in the order of their expected useful life. Land is usually listed first, followed by building, furniture and fixtures, machinery and equipment, and vehicles.

The initial value of fixed assets in your records is the cost you incurred to acquire them. Except for "land" which does not wear out, fixed assets deteriorate each year. The estimated amount of the deterioration is charged as an expense to your business for the year, and is entered on your profit and loss statement as a depreciation expense.

There are several methods of calculating the depreciation of fixed assets. When choosing one of them, consider your business's size and profit picture. Your management consultant and/or accountant can explain the benefits of each accounting method and help you select the most appropriate one for your business.

Leasing Assets

Before purchasing fixed assets, consider the costs as well as the future expansion needs of your business. Alternatives such as leasing certain fixed assets or perhaps purchasing used items should also be evaluated.

Leasing can be a very viable alternative to the acquisition of machinery, equipment, or vehicles. If your fixed assets could be affected by new regulations, or changing technology, leased assets may be a good choice. Leasing may also be a good way to keep free a substantial amount of working capital.

When you are seeking a business site you will need to consider:
  • volume of customer traffic
  • initial price of land
  • potential market growth
  • ease of access
  • ongoing cost of services
  • availability of supplies
  • availability of labour
  • growth and expansion potential for the foreseeable future
When you are seeking a building you will need to consider:
  • layout of offices
  • arrangement of machinery
  • layout of showrooms or warehouse
  • local planning regulations and permits needed
  • expansion potential, horizontally or vertically
Your business may depend on fashionable furnishings and fixtures to project a certain image. The expense of a specialized decor may be warranted but good service must always accompany even a luxurious waiting room.

Whether fixed assets are leased or purchased, new or used, they should always contribute to the profitability of your business. Good management practises on your fixed assets will assist to keep expenses in line and improve your competitiveness.

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