Blue Elevator Blog

The Caring and Feeding of Assets

There are three costs to consider when it comes to the caring and feeding of assets.

I forgot where I heard about the three costs, but it was enlightening.  Now, I’m paying it forward, so to speak.

Here is a trustworthy saying:

“What has been will be again, what has been done will be done again; there is nothing new under the sun.” — Ecclesiastes 1:9

Nothing New Under the Sun

There is nothing new under the sun.  Now, am I revealing some new and unknown trick or tidbit?  No, this has been said before.

God willing, I just want to be faithful to pass along what God has blessed me to learn.

There are Three Costs to Consider

When it comes down to the caring and feeding of assets, consider these three costs:

1. The cost to acquire an asset.
2. The cost to maintain the asset.
3. And, the cost to dispose of the asset.

Cost #1: The Cost to Acquire an Asset

Now, I can remember someone once calling me “Captain Obvious.”  I think it was a term of endearment and meant in good spirit.  And, in keeping with dealing it straight, let’s keep it simple.

If you want to acquire an asset, you have to be able to acquire it.  Or, at least, be able to finance it.  If you want to buy a home, you have to have the money — or be able to qualify for a loan.

But, there’s also another cost to consider: In certain cases, you will need to consider any additional costs required to move the asset.  Then, place it into its intended service.

FREE Home

Have you ever come across an ad that reads something like, “FREE Home. You Just Have to Move It”?

As our rural areas get built-out, sometimes a historical home stands in the way of a 250 home development.  To prevent outrage over razing a 100-year-old Craftsman Bungalow, the developers are hoping to make a match.

Yes, the home is FREE.  But it might cost a pretty penny to transport it, put it on a new foundation, get it ready to live in, etc.

Capitalization

The term capitalization is a fancy accounting term for recording an asset.  This is the process of placing an asset onto the Balance Sheet of an organization.

And, by definition, to record an asset, you capitalize the cost of the assets plus any ancillary costs necessary to put the asset in place and ready it for its intended use and purpose.

If you want to purchase an asset, you have to be able to afford it.  And, bring it home, so to speak.

Cost #2: The Cost to Maintain an Asset

Next, you need to consider the cost to maintain an asset.

(Hence the title, The Caring and Feeding of Assets)

Getting an asset home is only part of the battle.  You also have to be able to maintain it.  How’s that for Captain Obvious?!

• Homes need to be painted, repaired, and remodeled from time to time.
• Vehicles need tires, brakes, oil changes, and R & M (repair & maintenance).
• Additionally, that sophisticated machine that cranks out widgets needs to be calibrated, lubricated, attenuated, etc.

It’s rather obvious, but you’d be surprised to learn that many of us become enamored with the idea of a new asset.  But, do we have the capacity to get it in place and maintain it?

Silver Bullets: Putting an Asset in Place

Here’s an example of Cost #2: Maintaining an Asset.

I spent a good number of years working in Fortune 500-level organizations.

During the 80s and 90s, there was a lot going on within the computing and data processing field.  Specifically, developers were rolling out some pretty fancy EDP (Electronic Data Processing) systems.

Back in the day, companies employed a large number of accountants that did everything by hand, so to speak.  Ledger paper and 14-column pieces of paper were used to do everything:

• Buying supplies and inventory.
• Moving items from Raw Material, to Work in Process, to Finished Goods.
• Recording the revenue and expense side of sales.
• And, calculating and recording all kinds of things (Purchase price variances, labor rate variances, labor efficiency variances, fixed and variable overhead spending variance, fixed and variable overhead efficiency variance, selling price variances, and material yield variance).

Sound like a lot?  It was.  Obviously, you can see there were and are a lot of moving parts to account for.  This was the driver behind these new, automated systems.

Silver Bullets — Maybe Not?

These “software programs” were sold as silver bullets, panaceas, and cure-alls for your organization’s cost accounting woes.  The value proposition was to buy a program that would do everything for you, and do away with the platoons of bean counters (e.g., accountants).

So, the idea was that a company or organization would spend $500,000 to $1,000,000 for a super-sophisticated software program.  Then, they would buy it and put it into place.

But, there was a rub: These programs were super sophisticated in and of themselves.

Have you heard the phrase, “Sometimes the cure is worse than the disease”?

Well, let’s just say that some of these software program purchases went unimplemented.  Or, they were only partially implemented.

The Cost to Use and Maintain

Now, remember, these programs were designed to replace large troops of accountants.  But, in reality, accountants were replaced by the staffing of large MIS (Management Information Systems) departments.  Today, we use IT (e.g., Information Technology) in lieu of MIS.

Have you ever tried to get intelligent accountants to help transition an organization to a massive computer software program that would eliminate their jobs?  You get the point.  Accountants didn’t readily embrace these massive systems.  There was the ease and familiarity of the old ways of doing things.  Plus, couple this with the idea of job-eliminating advancement.  This created the perfect storm and these programs were super complicated.

And, the cost of acquiring the program was only the icing on the cake.  You pretty much had to hire the developer/distributor to “consult” with you to teach and train you how to use it.

Needless to say, I did observe the case where these “intangible” assets were not deployed.  Acquired, yes.  Put into service, no.  Maybe partial service.

So, always ask yourself: Am I ready, willing, and able to not only acquire — but place into service — and then maintain the asset?

Cost #3: The Cost to Dispose

But for God, nothing lasts forever.  This side of heaven, everything living or constructed is subject to entropy.  This is the essence of the second law of thermodynamics.  In short, everything depreciates and deteriorates.

Thus, every asset will need to be summarily disposed.

The Wild West

My wife and I frequently take road trips — mostly throughout the “Old West” areas of the United States.

It’s very common in our travels to see abandoned automobiles sitting out in some pasture.  If you are a farmer or a rancher, and your 1940 Chevy pickup gives up the ghost, what do you do with it?

In some cases, nothing.  It might just sit where it gave out.  The expense and practicality of paying someone to move it won’t put shoes on the kids’ feet.

The Boneyard

Seemingly, every brick and mortar business has a boneyard.  A place where old desks, furniture, computers, phone systems, and vehicles sit.  I’ve served as a Controller/CFO/General Manager at various times in my career.  And, I was the one tasked with managing such.

Therefore, you may also have to incur time, energy, and dollars to move things along.

Don’t Overlook It

So, whatever you are buying results in you being the owner.  Don’t forget about factoring in disposal costs.

Sometimes, the cost to dispose looks different.

Case in point, if you are buying a vehicle or a piece of equipment, make sure you factor in trade-in costs.  Let’s say you are looking at two vehicles.  They both cost the same.  And, they are both reliable and will cost about the same to maintain.  Let’s say vehicle A has an estimated resell/trade-in value of $1,000 at the end of eight years.  But, vehicle B has an estimated resell/trade-in value of $5,000 at the end of eight years.

In this example, there aren’t disposal costs, per se.  But there’s a differential in values.

Summary

So, in the caring and feeding of assets, you will need to evaluate three things:

1. The cost to acquire.
2. The cost to maintain.
3. And finally, the cost to dispose.

Please contact us if we can answer any questions or be of any encouragement.