Fixed Assets: Their Role and Significance for Your SME

As a small business owner in Singapore, you understand that while reputation and market presence matter, it’s your assets that truly reflect your company’s value and potential. Assets like machinery, office equipment, and vehicles are vital investments that support your business’s growth. In this blog, we’ll explore what fixed assets are, their types, key characteristics, and essential tips for effective management.

What Are Fixed Assets?

Fixed assets are tangible items that your business uses for more than a year. These assets, such as machinery and office equipment, are essential for daily operations and help in generating revenue. For example, a production line machine or a company-owned vehicle fits this category and supports your day-to-day business activities.

Types of Fixed Assets

1. Current Assets

Resources that can be converted into cash within a year. Examples include:

• Inventory: Goods that can be sold quickly to generate cash.
• Accounts Receivable: Money owed by customers that can be collected within the year.

2. Non-current Assets

Long-term assets not easily liquidated. Examples include:

• Land: Real estate acquired for future development or operational needs.
• Plant and Machinery: Equipment used in the production process, such as manufacturing machinery.
• Buildings: Structures owned by your business, including office buildings and warehouses.
• Vehicles: Company-owned vehicles used for operational purposes, such as cars and trucks.
• Office Furniture: Items like desks, chairs, and filing cabinets used in your office.
• Computer Equipment: Servers, computers, and other IT hardware essential for business operations.
• Tools: Specialized equipment used in specific industries, such as construction or scientific tools.

Key Characteristics

• Tangibility: Physical items you can see and touch.
• Longevity: Useful for more than one year.
• Illiquidity: Not easily converted to cash.
• Capitalisation and Depreciation: The cost of fixed assets is capitalised and spread over their useful life. 
• Income Generation: Fixed assets support business operations and contribute to generating revenue.
• Ownership and Control: Fixed assets are owned and controlled by the business, impacting its financial statements and operations. 

Advantages

• Financing Collateral: Fixed assets can be used to secure loans. For example, you can use your company’s machinery as collateral for a bank loan.
• Tax Benefits: Depreciation on assets can reduce taxable income. If you have a vehicle used for business, its depreciation can help lower your tax bill.
• Value: Represents significant business investment. A well-maintained office building can be a substantial part of your business’s worth.
• Competitive Edge: Enhances operational efficiency. High-quality machinery can improve production efficiency and product quality.
• Revenue Generation: Contributes to long-term income. An efficient piece of equipment can boost production and increase revenue.

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Disadvantages

• High Initial Cost: Requires significant investment. Purchasing a new piece of machinery involves a substantial upfront expense.
• Maintenance: Needs regular upkeep and occasional upgrades. An office air conditioning unit requires regular servicing.
• Storage: Requires physical space. Storing additional inventory or machinery may need extra warehouse space.
• Illiquidity: Difficult to quickly convert to cash. Selling a company vehicle or property can be time-consuming.

Managing Fixed Assets

• Inventory Management: Track assets with detailed records. Maintain a log of all your equipment, including purchase dates and locations.
• Maintenance: Schedule regular upkeep. For example, schedule routine servicing for your company’s vehicles to ensure they remain in good condition.
• Depreciation: Systematically manage depreciation. Use software to track how the value of your assets decreases over time.
• Disposal: Plan for asset disposal or sale. Develop a strategy for selling or recycling old equipment when it’s no longer needed.

Recording Fixed Assets

• Initial Recording: Capture purchase costs including installation. Record the total expense of buying and setting up a new piece of machinery.
• Depreciation: Use methods like straight-line or reducing balance. 
• Revaluation: Adjust asset values as needed. Revalue your real estate if its market value increases significantly.
• Impairment: Recognise and adjust for any losses in value. If a piece of equipment becomes obsolete, adjust its book value accordingly.
• Disposal: Remove assets from your records upon sale or scrapping. 

Summary

Fixed assets are vital for your business’s growth and operational success. By understanding and managing these assets effectively, you can optimise their value, ensure compliance, and strengthen your financial position. Accurate record-keeping and strategic management will help you make the most of your investments.

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