When it comes to business asset management, companies often use a ROA (return on assets) analysis to measure how well their managers use creative thinking to maximize the company assets and increase the company’s revenue. Performing a ROA analysis involves a simple calculation. The resulting figure then becomes the basis for all future comparisons. In and of itself, the initial number has little meaning. However, the importance of the analysis comes from what management does to increase that figure.
Return On Assets: Increasing Revenue and Maximizing Asset Utilization
As mentioned, the calculation involved in the ROA analysis is easy. It simply involves taking the company’s net income and dividing it by its assets. A company’s assets are always listed on its balance sheet and include its inventory, equipment & machinery, receivables, land, and any other miscellaneous items such as computers and office equipment.
A company’s net income is found on its income statement and is its total earnings minus operating expenses, cost of goods sold (COGS), expenses in administration, and depreciation. Again, the calculation itself is the easy part. The hard part is what management then decides to do to increase the value resulting from the initial calculation. Here is the calculation below:
Return on Assets = Net Income / Assets
Let’s assume a company’s net income is 7 million and its assets are 50 million. In this case, their ROA is 7 million divided by 50 million. The result is 0.14, which is then converted to 14%. Many companies use return on assets analysis as a tool to measure how well their company derives income from its assets. If you were an investor comparing one company’s ROA value to another, then the company with the higher value would be better at deriving profit from the company’s assets.
While this is all good for investors, in our case, we’re interested in the ways a company can increase its ROA value. To increase the value means to better utilize the company’s assets. Surprisingly, it’s not that difficult.
Performing a value chain analysis will help your company define its core competencies and its value assertion. In the end, it may help you isolate areas of strength that could be leveraged to increase revenue. To learn more please go to Your Value Chain Defines Your Value Assertion: B2B Marketing Essentials
Maximizing Your Company’s Assets
As mentioned, the initial figure will become your measurement for future comparisons. To increase ROA involves management’s ability to enact approaches that increase asset utilization. Don't confuse this with asset allocation which is the time needed to allocate your company’s assets for existing business.
In our example, we’re looking for ways to increase asset utilization by maximizing the downtime when assets are less likely to be used. So, in our example, I am referring to a company’s physical assets of equipment, machinery, computers, and the like and what can be done to increase their utilization when confronted with downtime.
To give you some idea of what’s possible, consider the following example. I’m sure you’re aware of Universal Studios and their Universal tour. Well, Universal took their movie sets and decided to maximize these assets by providing tourists and movie fanatics with a chance to see some of their favorite movie memorabilia up close and in person. Before this, movie sets were constructed and eventually torn down. By thinking outside the box, Universal was able to increase its asset utilization, expand its business and increase its revenue.
Increase Your Company’s Asset Utilization
While the above example demonstrates one approach, it’s not quite that different from what the typical company could do. A perfect example included a client of mine who manufactured custom-made components and assemblies for the wireless sector. Like most businesses, this manufacturer had busier times of the year and periods where customer demand dropped. When business was slow, their asset utilization decreased and some machines were left idle during the week and on the weekend. So, what did we do during these slower periods?
1. Rented out Existing Assets
First, we decided to use the CNC (computer numerical control) machines as a training tool for a local trade college. We started renting out the machines during the weekend and charged for one of the company’s technicians to be present. Eventually, two technicians were needed, and finally, the company expanded the weekend training to include the other equipment within its facility. The best part of this entire situation was that the company was training future employees as the trade college became one of their main sources of recruits.
2. Pursued Complimentary Markets
Second, while the above was somewhat of a short-term solution, the next was more permanent. The company maximized asset utilization on its CNC machines during slower periods of the year by pursuing complementary markets requiring easy to machine, and easy to manufacture products. Now, this is often much easier said than done, but the purpose was to first increase asset utilization with the machines – as they did with the trade college. The next step was to work towards finding a more long-term alternative.
3. Sublet Existing Warehouse Space
Finally, the company had additional warehouse and office space that it decided to sublet to smaller companies. One of them was an independent accountant and another a small distributorship. Both were able to use the available office and warehouse space for their business. Extra warehouse space was also used as a revenue source allowing local distribution outlets easy access to inexpensive warehousing.
When it comes to business asset management, maximizing your company’s assets need not be a complicated endeavor. Most companies would love to have a complimentary market to level out the ups and downs of their business cycles. While the example of the trade college might seem somewhat basic, sometimes the simplest solutions produce the most significant results.
The purpose is to take the time to use creative thinking and maximize asset utilization. Companies do it all the time and your company can as well. You might just find there are far more uses for your company’s assets than you ever imagined. It will create additional revenue, protect against seasonal business cycles and ensure your company is constantly trying to increase its core competencies.
Charging for product returns is one way to cover your company's inventory carrying costs and increase your return on assets. To learn more about properly charging restocking fees please go here.
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