Why is asset management important to a business?
Knowing how efficiently you manage and use business assets to drive revenues and generate earnings is essential to understanding how to increase business value. While various dashboard reporting tools and solutions designed to monitor receivables, payables and cash flow are helpful in addressing daily decision-making needs, the question asked most frequently by business owners is actually one of overall business value and how to increase it.
Business value is generating sustainable cash flow. If you run a highly efficient business, the more top-line growth you deliver, the more cash flow you enjoy. For capital-intensive businesses (either through the need for capital equipment or working capital), growth can actually lower your cash flow and diminish your business value. To understand which side of the equation your client resides, accounting professionals will often look at the return on total assets calculated over time, dividing the operating income for each period from the P&L by the appropriate period values of total assets from the balance sheet. The resulting metric describes how efficiently assets are applied to creating earnings.
Understanding the return on total assets helps business owners understand whether or not the business has to spend more money in order to grow the same volume of earnings. A higher number indicates the business uses its assets efficiently and effectively to drive revenue, while a lower number demonstrates a higher cost of growth. Accountants and business advisers should be monitoring this metric for their clients, helping to identify which path to profitability and growth makes the most sense for that particular business.
The numbers will vary with different business types, so comparing client performance to others in the same industry can provide a great deal of strategic insight. The “return trend” may also be benchmarked against the competition and peer businesses. If the business is utilizing assets more efficiently than competitors, it can represent a significant business advantage.
Accounting professionals need to take a proactive approach to working with clients, and make use of the historical information they’ve developed to deliver business insight and intelligence to help them more profitably move forward. While every business needs a tax return completed, they also need help understanding how to increase profitability and overall business value. Knowing that there are several ways a business can increase profitability, you can help your client understand that driving more sales and improving margins is only part of the story. Businesses can also improve cash flow and their return on total assets metrics by decreasing the base of business assets, disposing of excess equipment, or simply by doing more with less. By doing this, business owners will drive up their business value and create more options for their future.
Special thanks to Matt Ankrum of BodeTree for helping me get this right. We don’t all have the years of experience or expertise to “just know” what the right answer is, and sometimes we know the data is telling us something new, but we’re not sure what it means or what to do about it. BodeTree is the tool advisors and consultants can use to not only identify items that need more attention, but to understand what actions to take to make the necessary adjustment or improvement.