their theses and papers. He has always wanted to share his knowledge and experience with the younger generation and to spread awareness about good physical asset management practice as much as he can. At the same time, he sees great opportunities to do research and to innovate within the field of physical asset management while he works on his PhD.
Darren’s ultimate dream is to become a professor, but he realizes it will not be easy.
PHYSICAL ASSET MANAGEMENT IN ORGANIZATIONS
“Assets are the livelihood of organizations. By definition an asset is anything that has potential or actual value to an organization.” This is how Darren starts his conversation with Jerry Detunam, who has been waiting for him in the hotel lobby.
“Organizations have different types of assets that they own/use in their operations to generate income,” Darren continues. “There are different types of assets in an organization:
• There are fixed assets, also known as non-current assets, which can be tangible, such as machinery, plant, and equipment, or intangible, such as brand, goodwill, etc.
• Current assets are inventory, cash, etc.
• Organizations also deal with financial assets, which can be in the form of current liabilities (short-term debts) or non-current liabilities (long-term loans, debentures, etc.).
• Another type of asset that organizations have to manage is people, which include their salaries, benefits, and expenses.”
Jerry is attending a workshop at 9:30 in the hotel. So they have a little under an hour to chat. Darren had a quick breakfast on his way and managed to get to the hotel on time. He feels a little exhausted after his swimming workout and is relieved that they found themselves a quiet and comfortable corner in the lobby of the hotel to talk.
With his inseparable stainless-steel water bottle clad with the Ironman logo in his hand and slouching on the sofa, Darren continues: “So, the assets owned by an organization are accounted for in the balance sheet, also known as a ‘statement of financial position.’ The balance sheet is divided into two parts. On one side you have the assets, and on the other you have the liabilities and shareholders’ equity. Technically, the two parts must balance each other out. Assets are what a company utilizes to operate its business, while its liabilities and equity are two sources that support these assets. In a balance sheet, there are two types of assets registered: current assets and non-current (fixed) assets.”
“It looks like I am getting a financial crash course!” Jerry says with a smile.
“Yes, indeed. It is very important that you understand all the aspects of assets in organizations before you think about asset management,” Darren adds. He explains: “Current assets have a lifespan of one year or less, meaning they can be converted easily into cash. Such asset classes include cash and cash equivalents, accounts receivable, and inventory. Inventory represents the raw materials, work-in-progress goods, and the company’s finished goods. Fixed assets are assets that are not turned into cash easily, are not expected to be turned into cash within a year, and/or have a lifespan of more than a year. They can refer to tangible assets or physical assets such as property, plant, and equipment. Fixed assets also can be intangible assets such as goodwill, patents, or copyrights. While these assets are not physical in nature, they are often the resources that can make or break a company—the value of a brand name, for instance, should not be underestimated.”
“Depreciation is calculated and deducted from most of these assets, which represents the economic cost of the asset over its useful life.”
Darren sighs and continues: “Now let’s talk a little about liabilities and shareholders’ equity. Liabilities are the financial obligations an organization owes to outside parties. They can be in the form of debts and other non-debt financial obligations, as well as short-term or long-term borrowings such as debentures.”
“How about employee salaries?” Jerry asks.
“Good question. Organizations invest in skilled human resources that are critical to operations. Human capital is regarded as the most important asset of an organization. On the balance sheet, salaries and wages that have yet to be paid are considered a liability. That is because it is money owed to a party outside of the organization. For salaries already paid, they can be treated as direct or indirect labor in the accounting system and even sometimes included in the asset section of the balance sheet if they’re considered capital expenditures. The bottom line is that investment in human assets has to be accounted for in the financial reporting whether as a cost item or as an investment, which is another big debate in itself.” Jerry does not look quite content with the statement, but Darren continues with his explanation.
“Shareholders’ equity,” Darren says,“is the initial amount of money invested in a business. It is also referred to as the owner’s residual claim after debts have been paid and is equal to an organization’s total assets minus its total liabilities. Shareholders’ equity represents the net or book value of a company.”
Darren bends over toward Jerry and says in a measured tone: “To be financially sustainable, an organization needs to be able to maintain its financial capital, its fixed assets capital, and its human resources capital over the long term. If any of those go awry, it means the organization is not performing at its best.”
“It is imperative for organizations to manage those assets diligently and realize maximum value in order to remain competitive and profitable. To effectively manage those assets, organizations are structured in such a way as to provide the required governance, leadership, and support to achieve their strategic objectives.”
“Research that was conducted on over a hundred organizations globally shows that large municipalities manage an average 35 billion dollars of assets, while major companies manage an average of 100 billion dollars of assets.”
Darren looks at Jerry with an air of confidence and resumes: “You walk into any organization and you can see that those assets are closely managed by a team of experienced and skilled staff. In many cases, you will even find that those teams are led by C-suite executives to provide better direction, planning, and execution, as well as compliance with industry regulations. Modern organizations have realized how important strong leadership, governance, and accountability are, because the executive team is a reflection of the organizational structure. It is the governing body that sets firm strategy, coordinates activities, and allocates resources across business units. Studies have shown that more and more organizations are increasing their number of corporate functional managers. This phenomenon is called ‘functional centralization.’ Functional centralization refers to the process to increase centralization of activities in organizations to realize synergies.”
Darren starts making some gestures with his hands, a sign that he is getting excited by the conversation. Waving his hands around, he continues his explanation. He tells Jerry: “To exploit the synergies in organizations, activities from different business units have to be harmonized. An example of how corporate-level functional managers are used to capture synergies is Procter & Gamble’s shift in 1989 toward a matrix organization. Functional senior vice presidents were engaged to manage functions across business units in order to promote ‘the pooling of knowledge, transfer of best practices, elimination of redundancies, and standardization of activities.’” [Guadalupe, M, Li, H, Wulf, J, “Who Lives in the C-Suite? Organizational Structure and Division of Labor in Top Management,” Management
