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How Ghost Assets Impact our Bottom Line
What are ghost assets and what do they cost businesses?
If you don’t use a type of tracking software to audit your fixed assets, your company is likely haunted by ghost assets. Unfortunately, chances are high that you’re not quite sure what ghost assets are, or how they affect your revenue, accounting books, and taxes (74% of small business owners and managers admitted these findings in the Wasp Barcode Small Business Report).
A ghost asset is a fixed asset that appears on your businesses’ general ledger. The item was purchased, at one point, to help in the production of income (such as a piece of warehouse equipment, laptops, vehicles, real estate, and so on) and has since disappeared from your physical workplace or has otherwise been rendered unusable. This means that while you’ve been accounting for an asset on your books and in your tax returns, it hasn’t contributed to your bottom line since becoming a ghost.
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As you can imagine, allocating valuable resources, namely, your company’s time, energy and money, to assets that essentially no longer exist can be a huge drain, and can turn a profitable business into a losing enterprise. Poor accounting is one of the top 10 reasons small businesses fail (according to the New York Times). Ghost assets are a real and painful symptom of poor accounting.
Asset Tracking Software
To better understand the severity of this issue, here are seven ways ghost assets impact your bottom line:
1. Increased property taxes
Personal property taxes are often levied by states on machinery and equipment, and these taxes are usually based on a company’s self-reporting to an assessor via its ledger. If your company hands over an inaccurate fixed asset ledger (FAL) that includes assets which no longer exist, the calculated personal property tax liability will be higher than necessary. This lack of accurate accounting can erode your bottom line and result in thousands, if not hundreds of thousands, in excessive property tax dollars for small businesses.
2. Increased insurance premiums and risk
Similarly, assets that don’t exist don’t need to be insured, yet companies pay insurance for ghost assets and as a result pay unnecessarily high premiums. On the other hand, if upgrades to a company’s production line, warehouse or other means of creating inventory have not been properly accounted for and insured, the company may be under-insuring its assets and increasing its exposure to loss. A particularly problematic and risky behavior is when the assets used for your business are customized and unique to your product line and you have a lack of proper insurance coverage. This oversight can result in costly penalties if you aren’t properly keeping track of these products and insuring them.
3. Budgeting issues for future capital expenditures
If business is good, you may decide to ramp up your means of production in order to meet increasing demand. This is incredibly good news for your business, especially if you have the capital to buy new fixed assets. If you’re tying up crucial cash in assets that don’t exist, you won’t have the liquid means to invest in new machinery, vehicles and other means of production. Fixed assets, by their nature, are not meant to be converted quickly into cash, and thus you’ll be stuck with limited means to upgrade, instead, you’ll have to dip into your hard-earned revenue to do so.
4. Workflow issues
Perhaps you believe you have the means of production necessary to meet current or even rising demand. If that prediction is based on nonexistent, fixed assets, you may suddenly find yourself short of essentials for your production, possibly during the middle of a work rush. Common reasons for the creation of ghost assets include unrecorded trade-ins, cannibalization of existing machines in order to fix other units, and factory rearrangement resulting in scrapping what were thought to be unneeded items. All of these factors can result in the sudden realization that the assets you thought were in place are, in fact, merely ghosts, and unable to help in production.
5. Inadequate asset management system
Ghost assets are usually the result of an inadequate, often manual, asset management system. In the 21st century, there is simply no excuse for continuing to track your assets and inventory by hand. Automated systems incorporate barcode and/or RFID technology to keep track of your assets. Included in automated systems are the check-in/check-out status, current location, and it will even track important information like depreciation levels and maintenance schedules of all equipment. The money spent on asset tracking software results in a massive return on investment over time.
TIP: Various asset management systems feature different technologies that are better suited to certain types of businesses, so be sure to research which systems are best for you before investing.
6. Wasted employee resources
A related symptom of inadequate asset management is the fact that employees tasked with locating your fixed assets will spend hours connecting the dots that could eventually lead nowhere when it comes to ghost assets. In an effort to track every asset correctly, a near impossible task, workers spend thousands of hours doing a job that quality software can do instantaneously. Companies that integrate asset tracking software see reductions in audit times by as much as 75%, allowing employees to better allocate their time towards production and growing your business.
7. Legal ramifications
Inaccurate financial reporting as a result of ghost assets means the possibility of being out of compliance with the Sarbanes-Oxley Act, which was passed in the early 2000s to counteract a rash of accounting scandals by large companies. With increased auditor focus on internal controls, a lack of oversight resulting in company overvaluation (intentional or otherwise) can be devastating for your company. Organizations found to be non-compliant sometimes face heavy fines (reportedly between $1 million and $5 million) and can even face the possibility of imprisonment for either the mistaken or willful ignorance of CEOs. Consumer and investor confidence will take a massive hit if your company breaks securities laws as well.
Despite their incredible financial and material importance to the company, a company and its auditors don’t exert nearly the same effort tracking property, and equipment as they do inventories and receivables. Perhaps this is because inventory records are more pressing in order to meet production and sales commitments, while fixed asset management can too easily be put on hold to be handled later. This is how ghost assets are formed, and how they begin to drag, almost invisibly, on the company’s bottom line, until it’s too late.
Ghost assets, ironic name aside, are very real, on average, 12 to 25% of the assets included in a fixed asset ledger don’t exist. Knowledge is half the battle, and a smart investment in the proper technology can help keep these non-existent items at bay, and your business functioning the way it was meant to.
How could implementing a dedicated asset management system allow your business to save money with accurately tracking expensive assets?
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