Assets and inventory are capital intensive, and so it’s important to ensure they’re being optimally utilized. If something is costing you a lot of money, you need to make sure you’re getting your money’s worth.
This brings us to two important questions:
- How can organizations define “optimally utilized”?
- If assets and inventory are not being optimally utilized, what can organizations do to improve?
Let’s address the first question with just three simple words: asset turnover ratio.
What is asset turnover ratio
Asset turnover ratio measures the value of a company's sales or revenues relative to the value of its fixed assets. The asset turnover ratio shows how efficiently a company is using its assets to generate revenue. The higher the ratio, the healthier the company.
To put it simply,
Asset Turnover = Total Sales / Average Net Fixed Assets
For example, if a company has had $50,000 in sales and has $250,000 worth of fixed assets, the asset turnover ratio is 0.2. That means $0.2 of sales is generated for every dollar invested in fixed assets. The metrics vary by industry since, for example, a bank has far fewer fixed assets than a company that owns a fleet of cement trucks.
How to calculate your asset turnover ratio
Here’s how to get started:
- Begin measuring your asset turnover ratio if you aren’t already. Use the formula in the previous section to calculate asset turnover ratio for the past six months, to get a sense of trends.
- Once you have a sense of your organization’s asset turnover ratio, look at other players in the industry and your direct competition to see how you’re performing in comparison.
- Once you’re done carrying out an as-is, keep track of any changes in your fixed asset ratio. This can help determine if you’re over-invested in your assets or if you need to invest more to grow.
So, to answer the question “How can I define optimally utilized?”, look at your organization’s asset turnover ratio.
But calculating the asset turnover ratio is only the first step here. Once you’ve determined how you’re fairing, the next step is to begin the work of improving it, especially if you discover your asset turnover ratio is too low.
What can you do to improve? Let’s look at some answers.
How to Reduce Asset Costs
Unfortunately, asset-intensive companies don’t always see a high asset turnover ratio as downtime is almost inevitable. However, there are ways to optimize the way assets are being managed to prolong their useful life. Reducing asset costs doesn’t have to mean adversely affecting quality and efficiency. Reducing asset costs can go hand in hand with improving both quality and efficiency.
This is where maintenance management comes into play. Maintenance management allows organizations to track and update all inventory and assets to ensure everything is going smoothly. However, one of the biggest factors to consider with maintenance management is how it’s being carried out. If you’re still using paper, spreadsheets, or basically any manual methods of logging data, chances are good that both quality and efficiency are being adversely impacted.
Filling in data manually distracts maintenance professionals from focusing on what you really need them to be doing. They’re focused on paperwork instead of assets.
Roughly 88% of spreadsheets contain errors. And even the smallest error could cost millions of dollars in losses.
While there’s a long list of disadvantages to manual methods, let’s shift our focus back to the importance of automation to increase asset life. But if you want to know more about the problems of manual methods, check out our blog 10 ways CMMS is better than spreadsheets.
How a CMMS boosts asset turnover ratio
It might seem at first that investing in a CMMS is the same as investing in any other asset, but the benefits are what sets it apart.
Automated email alerts and reminders
Does your maintenance department carefully read through Excel sheets or paper logs to see what preventive maintenance is scheduled for that day?
My guess is they don’t. Even if they do, it’s not hard to miss a scheduled preventive maintenance task. A CMMS changes this because it can be configured to send out automated reminders to maintenance professionals, both technicians and managers, informing them of tasks due and tasks completed. On top of that, alerts can also be scheduled for tasks left incomplete at the end of the day. By ensuring regular upkeep, all your assets are going to run better, longer.
With advanced reporting capabilities, a CMMS software helps managers make strategic decisions about resource allocation. A CMMS can show all the allocated resources on a particular day at a glance. The interactive floor plan feature gives a single snippet that can allow managers to see where exactly on the floor a particular technician has been assigned and to exactly what task. The power of informed decision-making is huge for a business, especially one that has a fleet of equipment that’s hard to maintain. Additionally, managing a facility optimally requires analyzing heaps of data which can be done at the click of a button using a CMMS. With a paper- or spreadsheet-based system, everything requires so many extra steps, and each step creates opportunities to introduce mistakes.
A CMMS does a great job of tracking every update that’s made to an asset. Ensuring each team member tracks every asset, no matter how big or small, is impossible when using manual methods. Having a history of every record in turn helps prolong asset lifetime by ensuring minimal reactive maintenance as regular updates ensure asset life longevity. For example, if you know preventive maintenance for a certain part needs to be carried out on the 5th of every month, after which a machine starts giving you problems, a CMMS allows you to track that history and send out reminders until the PM is closed out.
It’s important to remember that the impact of an improved asset turnover ratio takes time and consistency. Along the way, it’s important to track your asset turnover ratio regularly. An important takeaway is not just the importance of implementing a CMMS program, but of doing so successfully. Our blog post The Key to a Smooth CMMS Implementation goes over this in more detail. Our ROI calculator can help you predict how much a CMMS is going to save you.