Better utilisation of assets is often described as the key to a more efficient operation. This is because it's a very useful metric that can help managers figure out how to improve their business' bottom line by making better use of their company's assets.
There are several well-used measures of financial return in the business world, including Return on Investment (ROI), Return on Equity (ROE) and Return on Assets (ROA). A fourth one, Return on Capital (ROC), is one to watch closely, however.
As defined by Investopedia, this is a calculation used to assess a company's efficiency at allocating the capital under its control to formal investments. "The return on invested capital ratio gives a sense of how well a company is using its money to generate returns."
ROC is defined as:
After-tax operating profit / Invested capital
(Invested capital = Debt capital + equity capital - cash)
Understanding this return on your capital investments regarding equipment and machinery should be factored into your bottom line and considered in any significant decision making.
Without tracking asset utilisation in your business, you'll have little or no visibility on what value your assets provide. You won't have data on the productive output of assets, idle time or downtime that your assets experience. This means you'll have a limited understanding of the return on your capital investments, or when you'll make your money back on them. Without these insights, you'll be uninformed about your actual bottom line and how to take steps to improve your overall profit.
Without a robust asset tracking solution, your business may:
Assets are essential to every business. Therefore, it's worth investing in them and ensuring they provide an adequate return for your business. Asset tracking allows you to view which pieces of equipment are being used - as well as when and how often - across geographic locations.
This data enables management to make better-informed decisions, including whether to rent or sell an asset, see if its under-utilised or if owned assets from other locations can be deployed more productively. This can aid you in right-sizing your fleet of assets, either shrinking or growing the number of assets, or swapping these for different models, to get as close to 100% utilisation as possible.
Knowing where your assets are also increases their security by significantly lowering the risk of theft or asset loss and improving recovery rates if they are taken. Real-time reporting also ensures that essential maintenance is carried out on time to extend an asset's life and reduce expected downtime.
Asset tracking also helps identify underperforming assets using precise metrics on how often and how long a piece of equipment runs on a particular day or over a certain period. This provides the opportunity to improve productivity or consider purchasing or designing better equipment.
Your asset turnover ratio (aka asset utilisation ratio) shows how much revenue your business generates for every dollar invested in total assets. The higher the asset turnover ratio, the more efficient you are at generating revenue from your assets.
You can calculate this by dividing your total assets by your total revenue.
Asset Turnover Ratio = Total Revenue / Total Assets
For example, if your business has revenues of $100,000 and total assets of $50,000, the asset utilisation ratio will be 2:1. $100,000 / $50,000 = 2 (or 2:1).
That means your operations generate $2 in revenue for every $1 you have invested in assets. Using this information, you can create a benchmark to measure against in subsequent years or use it to compare against benchmarks in your industry.