The useful life (sometimes also called the service life) of a physical asset represents the duration during which it generates revenue for an organization. During its working life, an asset may depreciate to a point where it ceases to yield any financial (economic) results due to obsolescence, high cost of operations, and repairs.
Physical assets can be a big capital expenditure
Companies incur high capital costs to build physical facilities, purchase, install, and maintain production assets. Recovery of these capitalized costs takes a long time (usually years), making it necessary for companies to extend the useful life of such expensive assets.
Several factors affect the useful life of expensive physical assets, including:
- Asset usage patterns. Physical assets that operate frequently are prone to wear and tear, which reduces their overall service life. Those assets that run for fewer hours, act as emergency or redundant systems are likely to have a longer service life.
- Inadequacy of existing assets. As the production needs increase, companies may find themselves struggling to meet their targets. The demand may overwhelm the production capacities of the existing physical assets, lowering the productivity and profitability of businesses.
- Age of asset at the point of purchase. The year of purchase of a physical asset may be different from the year of manufacture. While it guarantees an increase in productivity for a business, its purchase after several years from the date of manufacture may eventually render it obsolete. The asset may fail to meet the current emission ratings, energy consumption needs, or safety standards.
- Advances in technology. More physical assets are incorporating technological solutions like sensors, automation devices, cloud storage, and remote controls to improve the autonomy of processes and boost the quality of production. Assets that lack these technologies can contribute to production inefficiencies resulting in lower revenues.
The useful life of an asset varies from its actual life. A production asset can be operational but unproductive. At that point, it has a physical life but has lost its economic value and is ready for salvage or replacement.
Extended useful life and profitability
Businesses can achieve profitability directly or indirectly by extending the service life of critical production assets. Below are some of the ways for organizations to generate additional revenue and increase their baselines from their assets:
- Depreciation and profits. The useful life of an asset is crucial for estimating its rate of depreciation. A longer asset life translates to lower depreciation and higher profitability rates. Depreciation is an indirect operating cost on a company’s financial statement making it an allowable expense deduction by the tax authorities. Capturing depreciation costs in financial statements cuts down the taxable income of the company. It enables a business to retain a good profit margin while minimizing tax remittances.
- Accurate financial planning. By extending the useful life of physical assets, companies can perform sufficient financial planning to facilitate the timely replacement of critical production assets. Through depreciation calculations, the company estimates the remaining productivity time of equipment and plans production schedules accordingly. With the production plans in place, the business can create medium to long-term budgets for raw materials, logistics, maintenance costs, and wages for staff.
- Lower replacement costs. Extending the useful life detaches a business from the pressure to source funds for replacing equipment that prematurely retires or those that become obsolete before the full recovery of capital costs. Instead, companies can channel the revenue to spruce up current operations.
- Salvage value. At the end of its useful life, a physical asset is ready for decommissioning and salvage. By releasing it as scrap, the business recoups a sizable amount of cash in the process. Asset life estimates enable the organization to approximate the salvage value of an asset that forms part of its net income.
How to extend the useful life of assets
Physical production assets are a necessity for most businesses. They are costly to acquire and require proper attention to ensure they remain productive throughout their useful life. There are several strategies that organizations can adopt to extend the useful life of critical assets while cost-effectively maximizing their performance.
Perform proactive maintenance on physical assets
The quality and quantity of end products and service delivery rely on the availability and reliability of your physical assets. Unnecessary stops, asset failures, and product deformations are never a good thing. Having a robust maintenance program in place ensures that the physical assets operate optimally and safely.
Proactive maintenance guarantees the timely identification and correction of part defects that have the potential to cripple your business operations. When minute defects combine over time, they increase the probability of irreparable damage to expensive physical assets. Businesses that implement proactive maintenance measures like preventive maintenance and condition monitoring avert premature breakdown of physical assets.
Proper maintenance increases the efficiency of assets, making them available for long-term production. It lowers the cost of operation (lower energy consumption, minimum injury incidents, fewer replacement parts, and lower maintenance wages) and increases revenues.
Invest in asset tracking
Business expansions come with an increased asset base with units spread across different locations. Business owners and managers have to gain visibility of these assets and monitor their productivity in real-time. Asset tracking provides a centralized management platform that allows the owners to protect assets against damage and improve their asset inventory management.
Production metrics collected by tracking devices like global positioning systems (GPS), scannable barcodes, or radio frequency identification (RFID) are essential for adjusting asset usage patterns. Protecting critical assets from over-utilization becomes a priority with production schedules distributed evenly. It keeps equipment operational at normal levels and prevents damage resulting from overruns.
Implement technological solutions
Technology continues to support businesses as they strive to make their operations lean, sustainable, and cost-effective. The adoption of technological solutions continues to boost productivity through the improved accuracy of maintenance schedules.
Manufacturing businesses, for example, can use production planning software to forecast product demand - and adjust production schedules to match that demand. This way, assets are allocated the right amount of work, preventing cases of overloading, which may initiate part damages.
Probably the most useful digital solution for extending asset lifespan is Computerized Maintenance Management Systems (CMMS). It allows the maintenance department to manage and streamline maintenance operations for multiple assets. This way, no preventive work is forgotten or overlooked.
By giving access to manuals, logs, standardized procedures, and maintenance checklists, CMMS also ensures that the maintenance work is performed up to the required standard every time.
As an added bonus, CMMS can integrate with condition monitoring sensors which track equipment health in real-time. By catching early deterioration signs, maintenance teams can perform quick corrective actions and prevent serious breakdowns. Fewer serious breakdowns means longer asset lifespan.
Adhere to OEM recommendations
Original Equipment Manufacturers (OEM) supply their clients with equipment operating standards and spare part requirements. These provisions guide businesses on how to install, operate and maintain an asset. They also offer valuable recommendations on the type of replacement parts to use in case of damage.
Businesses have to adhere to recommendations such as periodic overhauls of critical parts, routine maintenance activities, and operational limits. They enhance production floor safety while assisting organizations to extend asset lifespan.
Extending the useful life of physical assets through proper use and appropriate maintenance can increase the financial prospects of any business. A longer asset life grants business owners an opportunity to minimize their tax obligations.
The availability of production assets over the medium and long term means that businesses can produce beyond their targets, break-even (recoup capital costs), and rake in more profits.
WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.
About the Author
Bryan Christiansen is the founder and CEO of Limble CMMS®. Limble® is a modern, easy to use mobile CMMS software that takes the stress and chaos out of maintenance by helping managers organize, automate, and streamline their maintenance operations.