Six Significant Problems with Managing Fixed Assets as Inventory

tumblr_static_logo_-_just_wrench_and_hammerWe talk a lot around here about having the right tool for the job. Using a wrench to drive a nail will certainly work, at least to a degree, but it’s definitely not the most efficient way to do it.

The issue of managing Fixed Assets as Inventory is something that has been around for quite a while. Is this the best way to manage assets, or is it just another way to manage assets? You purchase goods and/or services, or manufacture goods, and record it all in the Inventory system. One could argue that it seems easiest to have Assets go there as well.

Further, we see the convenience of keeping Item Descriptions, Serial Number tracking, and Purchase/ Manufacture History and Tracking within one application area (Inventory). The only key differences are the GL Account Number (Fixed Asset versus Inventory), and, possibly, the Warehouse. This eliminates re-keying information that was already captured during the initial purchase or manufacturing processes.

Despite these modest advantages, there are at least six disadvantages to this approach that I must address.

1. The Keyword is “Fixed”

Fundamentally, Inventory is expected to be transient, while Fixed Assets is not. Managing Fixed Assets is a much different discipline and business requirement than managing Inventory.

2. Different Purposes

Similarly, Inventory focuses on Quantities of an Item, while Fixed Assets is about a specific use of that Item.

3. Valuation Differences

Inventory revaluation is a business exception that’s typically reserved for obsolete Items, or used when the value changes drastically over a short period of time. But the value of a specific Fixed Asset can change at different points during ownership, due to completely different reasons, such as damage, improvements, etc. The accounting for these changes is vastly different and more complex with Fixed Assets. At a minimum, there must be a change to the depreciation schedule.

4. Location Issues

What if the Asset moves? Whether within the Company or between Customers (e.g. Leases and Rentals), tracking the movement both physically and financially requires precision. Inventory Systems aren’t in a place to accommodate such changes.

5. Inventory Registers

Inventory Registers that tie out to the General Ledger must account for the portion of the Inventory — specifically, the Fixed Assets portion — which really isn’t Inventory at all, and must instead be tied out to the Fixed Asset Accounts. While this can be done, it’s always better to be direct, and thereby more efficient.

6. Multiple Transactions

Many Fixed Assets are created and valued based on two or more purchase/manufacturing activities. A simple example is the acquisition of equipment that requires installation and set up. The initial purchase is one transaction followed by the installation and set-up, which can be several additional ‘related’ transactions. Once again, getting this exactly right with a Fixed Asset Management system is challenging, but it’s even more cumbersome when only using an Inventory system.

We’re proud of how powerful and useful FAMe is for our users. Even more so, we’re delighted when we hear that sense of excitement followed by, “This is so much easier!

That’s right – excitement about Fixed Assets!

So, about that wrench in your hand….