How CMMS Boosts Fixed Asset Turnover Ratio and RoFA
Whether it’s Kelloggs’ churning out corn flakes, Caterpillar building bulldozers, or Aunt Sadie crocheting dryer balls from yarn and selling them at the downtown farmers market, manufacturers of all sizes must invest in fixed assets to produce and distribute their finished goods.
Kelloggs’ buys machines that process raw corn to edible flake, box it and load it into trucks. Caterpillar mortgages robotic assemblers, assembly lines and warehouses. Aunt Cadie purchases a car – and maybe a loom?
These types of investments are capital intensive, enduring, and essential to producing, distributing and selling a product that is expected to generate revenue. A firm owns these tangible pieces of property, so they won’t be decommissioned, sold or otherwise jettisoned during a current fiscal year.
They are fixed – imperative to a product’s lifecycle. These assets usually cost a premium, depreciate, and can be found designated on a balance sheet as property, plant and equipment (PP&E).
PP&E numbers can indicate business trends. For example, if net cash flow persistently registers negative because of fixed asset investment, a company is more than likely growing, purchasing more production capacity to meet demand: more grain processors, robotic assemblers, warehouses, cars, trucks – and possibly looms.
The Case for Fixed Assets – and Maintaining Them
And with any capital investment, it is in the owner’s best interest to maintain the asset – and thereby incur even more expense.
Any fixed asset purchase must take into consideration not only the initial investment but also the upkeep expense. The cost of keeping an asset operating at its present level and in its present condition (routine maintenance) combined with the cost of rehabilitating an offline asset to its previous operational condition (reactive maintenance) comprise the two major maintenance costs related to fixed assets.
The rule of thumb is it’s always less expensive to proactively maintain an asset than it is to retroactively fix it. Consistently performing routine maintenance on fixed assets usually avoids high-ticket repairs and minimizes the risk that the production process might be disrupted. When all machines are operating, more goods are produced, and more revenue is generated for the business.
So, it should come as no surprise that if a company wants to fatten its return on investment, it should maintain its fixed assets – with zeal. Avid routine maintenance positively affects two distinct barometers of business health: Return on Fixed Assets (RoFA) and Fixed Asset Turnover Ratio (FATR).
Calculating Return on Fixed Assets (RoFA)
RoFA can be calculated by dividing a company’s current operational income with the investment cost of its fixed assets.
So, if a business earns $5 million and owns $20 million of fixed assets, it’s RoFA would be .25, or 25 percent. Translated: for every dollar of debt and equity spent, this company sees a 25-cent return in net profit.
RoFA can be crucial when the C-suite, Wall Street, and Main Street scrutinize a company’s profitability. For example, RoFA ratios from different periods can be compared to gain a sense of the company’s profitability direction. It can also be compared to competitors in the market. With the caveat: a capital-intensive business possessing high value fixed assets will reflect a lower RoFA than a similar-sized competitor that may have commensurate income but whose asset base isn’t as capital intensive.
Exploring Fixed Asset Turnover Ratio (FATR)
Similarly, Fixed Asset Turnover Ratio, a calculation embraced by manufacturers that typically purchase more PP&E to increase output, is a means to assess a business’s operating performance.
Simply, it’s a ratio of net sales to fixed assets. So, FATR measures a company’s ability to generate net sales from PP&E investments. Like RoFA, higher FATR signals that a company has more effectively utilized investment in fixed assets to generate revenue.
FATR has no ideal ratio or benchmark. It’s an indicator of a company’s profitability. If a company has a higher FATR than its market rivals, that company can be confident it’s using fixed assets to generate sales better than its competitors.
The Argument for Computerized Maintenance Management
So, where does maintenance management enter the picture?
Let’s begin with its purpose.
Management is all about maintaining the fixed assets and other resources in optimum operational order so that production proceeds without interruption and that no money is lost on avoidable downtime or other disruptions.
Its goals, then, are to control costs, schedule work properly and efficiently, and ensure regulatory compliance.
And while an astute maintenance manager can schedule fixed asset repairs in order of priority and promptly allocate resources to the most critical upkeep demands, he or she is only human. Errors in commission and omission will occur. Maintenance schedules will be forgotten. Parts misplaced or unordered. Fixed assets will fail. Production disruptions will erupt. Heads will roll?
Even the most ardent maintenance manager should retire the maintenance log of yesterday and replace it with today’s CMMS.
Why? Isn’t buying a CMMS just another fixed asset investment? And can’t computer programs fail to run or otherwise break down? And doesn’t learning to use the system require some sort of learning curve? A maintenance log isn’t – and doesn’t.
So, it’s “Yes” – to all questions; but consider that the strength and assurance of any CMMS lay in the database built from every facet of an organization’s maintenance operation (e.g., maintenance schedules for all machines, record of storerooms containing the needed spare parts).
This database not only eclipses human capabilities, but its three core functions positively affect RoFA and FATR. So, to a maintenance manager’s (and company’s) benefit, a CMMS:
- Records and tracks completed and assigned maintenance tasks in a timely and cost-effective manner. Digital tracking and recording of a maintenance schedule automate alerts, warnings, and other notifications to keep abreast of routine, preventative maintenance, lessening the threat of mechanical failure taking production offline and disrupting sales.
- Helps management make informed, strategic decisions. Aggregated operational statistics let management calculate and compare production performance from which strategic decisions can be made to better allocate resources. The upshot? Improved operational efficiency. Lowered production costs. More manufactured product ready for distribution and sales.
- Verifies regulatory compliance. If a company is out of compliance, production disruptions can arise as regulators could impede operations. CMMS records and correlates operational compliance, verifying that regulations have been met or notifying management if compliance is lacking.
These days, to properly manage facility maintenance in terms of profitability, huge amounts of data are required. Manually compiling this data demands tremendous amounts of effort and time that exceed the limits and capabilities of any maintenance manager.
So, retire the maintenance log and adopt a CMMS. Stay ahead of your maintenance management and let it take your manufacturing to higher performance, higher output and higher profitability.
Then, watch your RoFA and FATR fatten.
Keith Craig is Content Marketing Manager for Betterbuys. He has more than a decade of experience using, researching and writing about business software and hardware. He can be found on Twitter and LinkedIn.
While computing fixed asset turnover ratio, the formula is generally Net sales/Fixed Asset. However, there are cases where Cost of sales is used in lieu of Sales in ascertaining Fixed Assets. Can any one clarify the situations where Cost of Sales is used instead of Sales, while computing fixed assets turnover ratio?