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Why keep your Idle Assets? Three common challenges.

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Introduction

From experience it is the combination of brilliant people, unique processes and innovative design that brings truly great products to life. Manufacturing equipment underpins all of those elements and facilitates generational advances (think CNC axis, Additive, & Industry 4.0). These assets represent significant investments and are the "secret sauce" enabling new production techniques and innovations. Because of this and the significant investment in these assets, it challenges leaders to remain objective about selling idle assets.

The intention of this article is to share and debunk a number of the "arguments" I've heard in relation to effectively managing idle or surplus assets.

Identifying Idle Assets

Most enterprise accounting standards typically define an Idle Asset as something similar to the following:

"The asset is physically found, but is not currently in use and has no future use predicted for production, service, qualification or engineering development programs (i.e.,the organisation has no defined and documented plan to utilize the asset for generating future revenue)".

Often a further definition for "Temporarily Idle" assets is used to give further clarity:

"The asset is physically found, is not currently in use but has a future use planned for the production, service, qualification or engineering development programs (i.e., the organisation has a defined and documented plan to utilize the asset for generating future revenue)".

Assets can be rendered idle due to changes in business operations, such as a product development project being cancelled, commercial volume reductions, production being outsourced (i.e. produced by a third-party supplier), replacement asset installations and more.

IFRS (International Financial Reporting Standards) is the best source for additional clarification around how to manage idle assets (particularly IAS 16 Property, Plant and Equipment).

Common Arguments

Chain AMS provides solutions to finance assets and manage assets at end of life (from cradle to grave). We're often faced with challenges when helping customers with their idle and surplus assets. Across large multinationals, with multiple layers of approvals and decision makers, there can be disagreement regarding the disposal of idle assets, some common arguments we've heard:

“We don’t want to book a loss”
“We don’t want our competitor to compete with us by using our assets”
“It’s not the right time to sell”‍

Our goal is to ultimately reduce idle assets, ensuring the effective utilisation of assets and returning cash to the customer. Our most mature customers leverage an Idle Asset Review to support their annual planning processes across a global footprint, this drives the process rigour and accountability across all locations.

Whilst I strongly advocate the redeployment of assets internally, I aim to debunk / challenge some of the common arguments to retaining truly idle assets below. By following these principles, leaders can drive their organization towards a leaner, stronger and more utilisation-focused business.

“We Don’t Want to Book a Loss”

Earnings Per Share (EPS) is a key metric for Quarterly Earnings, the losses incurred from the disposition of assets at prices below Net Book Value (NBV) can drive down EPS. Leaders that dwell (too much) on EPS typically believe that impairments from idle asset disposition can dramatically impact EPS and therefore impact the stock price.

In the context of idle assets, this misconception can be harmful, especially during a downturn when cash is most needed. Cash is always king - Cash Flow from Operating Activities (CFOA) is another key metric for investors. For companies with a global footprint, selling idle/non-operating assets below NBV for cash is at worst insignificant and at best drives operating efficiencies and increased utilization of floor space, ultimately leading to increased productivity across the company.
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It is important to create the mindset of valuing and prioritizing the generation of cash proceeds from selling assets that are not producing profit. Shareholders value leaders that adopt an ownership mindset, this includes generating cash-flow by continually "cleaning out" unused assets.

“We Don’t Want Our Competitors to Compete with Us by Using Our Assets”

Manufacturing assets bring great products to life, we often hear the assumption that selling idle assets opens up the opportunity for competitors to buy assets at a discount and use them to compete. If assets are being sold because there’s inadequate demand for the services that employ them, then competitors should face the same inadequate demand.

Fixed overhead costs should only be considered when determining the long-term strategic decisions of whether you want to stay in that business and how much overhead you need to support it.

“It’s Not the Right Time to Sell”

In the minds of most Plant Leaders and Operations Managers, the time is never right to sell idle assets. When markets are strong, management often wants to hold onto assets just in case they’re needed to meet demand. During a downturn, they resist selling them because the price for the assets seems too low, particularly when considering Net Book Value (NBV).
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When broader restructuring activity (to "right-size" the organisation's footprint) has been communicated to investors, take the advantage of the write-down that will take place to P&E across the impacted locations. The need to retain assets that are known to be idle, and might be used should really be challenged through a thorough assessment of need and economic value add. The costs for removal, cleanup and transportation (and future carry cost - installation, insurance, power) should be top of mind. Remember, cash is king!

Conclusion

Disposing of idle assets provides significant value beyond the cash proceeds received. Across the lifecycle of an asset, the following costs occur:

  • Maintenance (Servicing, Maintenance Plans)
  • Management (Operations, Accounting, Auditing)
  • Storage / Housing (Insurance, Power, Heating)
  • Depreciation (Straight-line or Accelerated)

Disposing of non-operating idle assets in small increments (to avoid the optics of accounting losses) gives investors a false impression of the true economics of the business.

Operations & Finance Leaders should focus on the economic measures of overhead and cash (CFOA) instead of accounting profits (EPS). Whilst the disposal of idle assets results in a capital charge, this does drive the incentive to maintain appropriate asset utilization. It becomes more apparent that if an asset is idle and non-operating, then the business should sell it, even at an accounting loss.

A business should have a documented and proven plan for restoring the idle asset to use if redeployment is planned, and if not - should proceed to dispose of the asset. The secondary consequences are rarely understood or fully considered.

I am largely skeptical of most reasons for holding onto truly idle assets, leaders should leverage a rules based approach when managing a portfolio of assets, particularly when managing idle assets. Clear documentation and planning will drive long-term value for the business with respect to asset utilisation.

Solutions for identifying, capturing and disposing of surplus? How Chain AMS can help you:

Our Idle Asset Review product provides a fixed-cost approach to the identification and valuation of idle assets, with turnkey solutions for Redeployment (Internal Transfer) and Remarketing (External Sale) thereafter.

Contact us to learn more. Read the original article on LinkedIn.