Loss of fixed assets

Fixed asset losses

Fixed assets are assets which have an expected durability period of over one year, and are used to produce goods and services in order to generate profit. Fixed assets can include land, buildings, equipment, vehicles, office equipment and intangible assets such as patents.

Fixed asset losses can be a result of a variety of factors, and it is important to be aware of them, in order to avoid them or at least minimise their effects. These include theft, burglary and vandalism, natural disasters such as floods, earthquakes and hurricanes, fire, ageing of the equipment and machinery, damage due to accidents, errors in measuring and estimating equipment requirements, obsolescence and changes in government regulations.

Theft, burglary and vandalism can lead to significant losses of fixed assets and can usually be avoided by adequate physical security measures such as alarms, CCTV systems, fences and locks. Installing, maintaining and regularly testing these security systems can be an expensive strategy but can be an effective prevention, should burglars decide to target a location.

Natural disasters, such as floods, earthquakes and hurricanes can be more difficult to protect against and can often times lead to significant losses. Depending on the region in which a business is located, it is important to have an understanding of potential threats and the potential damage that these threats could cause. For example, businesses operating in coastal areas should prepare for possible flooding and hurricane damage. Such scenarios can be planned for in advance, and buildings constructed or plants set up in a way that is protected from such natural disasters.

Fire is another threat that cannot be completely protected against,and can lead to massive and expensive losses of fixed assets. Businesses should take steps to minimise the risk of fire, such as investing in fire alarms, sprinkler systems, fire extinguishers and smoke detectors. Moreover, ensuring that employees understand the importance of fire safety awareness may also reduce the potential for fires, as regular staff training and drills should ensure that employees are aware of the risks.

The ageing of equipment and machinery could lead to unexpected breakdowns and reduce their efficiency. Regular maintenance is therefore essential, and can prevent costly equipment problems. Additionally, it is important to buy the most suitable piece of equipment or machinery for the business’s operations, in order to ensure that new equipment that is: age-appropriate, energy efficient and of the highest quality.

Damage caused by accidents, such as vehicle accidents, human errors and software failures, can also lead to unexpected losses. Monitoring and testing processes need to be put in place and regularly checked, in order to minimise these risks. Regular staff training and refresher courses is critical in this respect, as this can reduce the likelihood of human mistakes.

Furthermore, if equipment is chosen incorrectly, either due to incorrect measurements or mistakes in estimating requirements, it can lead to costly losses. Careful planning and researching prior to the purchase is therefore key and provides a strong foundation for the selection of the right equipment.

Another potential factor leading to fixed asset losses is caused by the changes in government regulations. The environmental regulations, which are constantly evolving, can mean that businesses will have to replace certain assets in order to comply. This could result in the business losing their existing assets, as well as having to undertake significant costs on replacements.

Finally, equipment or machinery may become obsolete due to advances in technology. Whilst technology changes are inevitable and unavoidable, it is important for businesses to research alternatives before making a purchase and remain updated with the changes in industry.

Taking all the above factors into consideration, it is important for businesses to be aware of the potential risks and losses associated with fixed assets. All factors should be regularly reviewed and monitored, in order to be reactive and limit the damage to a minimum.

Fixed asset losses refer to losses in the value of fixed assets due to damage, corrosion, depreciation, obsolescence, and other extraneous factors. Fixed asset loss can also refer to the write-off of a fixed asset due to it becoming valueless.

Fixed asset loss can negatively affect a companys profitability and liquidity. When fixed asset loss occurs, the company must both write off the decrease in value as an expense and and reduce the amount of an asset it holds by the same amount. This double whammy dramatically reduces the amount of the companys assets, which can result in a better-than-normal decline in net income. The decrease in the value of a companys assets can lead to liquidity problems because the company has to first use current assets to replace or repair the fixed asset and then go on to finance the purchase of a new fixed asset.

In addition to reducing profitability, fixed asset loss also affects the companys competitive position in the market. A companys competitors may have more efficient equipment, better plant location, and higher quality management, all of which can result in higher sales and profits.

The most effective way to prevent fixed asset loss is to have a maintenance and repair strategy in place. Companies should periodically inspect their fixed assets and address any concerns they may have before the condition of the asset deteriorates. Companies can also create a preventative maintenance plan that will detect any issues with a fixed asset before it becomes a problem. Finally, companies should invest in replacing aging equipment with newer, more efficient technology. By implementing these preventive strategies, companies will be able to avoid costly and disruptive repairs and minimize fixed asset losses.