Asset Management (AM) explained
Asset Management (AM): this article explains Asset Management (AM) in a practical way. After reading it, you will understand the basics of this important financial management discipline.
What is Asset Management?
Asset Management (AM) refers to the systematic management and realization of all value for which a company or group is responsible. It can apply to both physical and intangible assets.
Physical assets include, for example, buildings and materials that employees work with. Intangible assets include intellectual property, financial assets or human capital. More examples of different asset types are discussed in this article.
The meaning of asset management
Asset Management (AM) is a systematic process of maintaining, operating, upgrading and disposing of assets in the most cost-effective way possible, including risks.
International Organization for Standardization
The International Organization for Standardization published a management standard for asset management in 2014. The ISO 55000 series includes terminology, guidelines and requirements for maintaining, implementing and improving asset management systems.
The term asset management is often used in the financial sector to refer to people and companies that manage investments and property of others.
These are, for example, asset managers who work for a pension fund to manage the pensions of a group of the population. The discipline takes many forms and is important in almost all sectors.
Common forms of AM are:
- Digital Asset Management (DAM)
- Fixed Asset Management (FAM)
- IT Asset Management (ITAM)
- Enterprise Asset Management
- Financial Asset Management
- Infrastructure Asset Management
The different types of asset management are briefly explained below.
Digital Asset Management (DAM)
Digital assets are all things that can be stored digitally so that companies can manage, create, publish and share them with parties both inside and outside the organization.
In the rapidly changing digital environment, it is difficult to put a limit on what digital assets can be. Files like videos, photos, documents, music, and crypto currencies are all examples of digital assets.
Digital assets are often managed with a Digital Asset Management (DAM) platform. This provides an effective and simple solution for employees of companies involved in digital asset management.
It offers a digital library that is made accessible to the people for whom the system was developed. Examples of people using such platforms include employees, customers, contractors and other key stakeholders.
Fixed Asset Management
Fixed asset refers to all items used by a company in its day-to-day operations. In general, physical assets are assigned to a particular place within an organization and remain there. Examples of fixed assets are appliances, sanitary installations, office supplies, land plots and large machines.
Fixed assets are also known as Property, Plant & Equipment (PPE).
These physical resources must be managed. Maintenance is often necessary and these assets produce data that must be monitored.
Example fixed assets
A conveyor belt in a factory is an example of fixed asset. The belt does not move within a company and is used by the same employees. To ensure optimum performance, the machine should be checked. In addition, it is important to continue to monitor the production speed so that timely action can be taken if the machine shows a defect.
IT Asset Management (ITAM)
ITAM is the process of ensuring that an organization’s IT assets are maintained, managed, deployed and upgraded as needed. IT assets are, for example, hardware and software systems within an organization. Like other resources, an IT asset has a limited useful life and lifespan. To maximize the value from this duration, active management is needed.
Enterprise Asset Management (EAM)
EAM organizes, manages, integrates and optimizes all physical assets an organization owns. This includes all documentation, inventory, facilities and documentation. EAM is different from the other forms of AM because it is carried out from a holistic approach.
Financial Asset Management (FAM)
FAM refers to managing financial wealth through financial instruments with the aim of growing the invested capital. An asset manager is an organization whose purpose is to manage assets. Asset managers, including pension managers, pool the savings of consumers and companies and invest it in the global economy.
There are many ways to invest money. This can include government bonds, private sector financing through stock and bond purchases, crypto and much more. The aim is to generate a return that is shared between the asset managers and the investor.
Active Asset Management (AAM)
AAM includes activities such as analyzing a client’s assets, to planning and managing investments. Everything is arranged by asset managers and they also make recommendations based on the financial situation of each client. Active asset management generally costs the investor more than passive asset management because there is more to it.
Passive Asset Management (PAM)
PAM assigns assets to reflect a market or sector index. Unlike AAM, PAM is less labour-intensive and therefore cheaper for the investor.
Infrastructure Asset Management
AM for infrastructure refers to the integrated and multidisciplinary approach to preserving public infrastructure assets.
Examples include sewers, roads, bridges, water treatment plants, railways and electricity grids. In general, infrastructure management focuses on the process of maintenance, repair and replacement.
Infrastructure management uses various software tools with the aim of extending the long-term life of assets. In the twenty-first century, adaptation for climate change has become a major goal in infrastructure management.
Example of AM ratios
AM ratios are a group of metrics and formulas that provide insight into how organizations have organized, used, or managed their assets. Using these ratios, stakeholders can draw their conclusions when it comes to the efficiency and effectiveness of investments. Some of the most commonly used asset management ratios are briefly explained below.
Total asset turnover
Total asset turnover is a ratio that measures a company’s efficiency when it comes to using assets to generate revenue. The higher the asset turnover rate within a company, the more efficient it is considered by stakeholders.
Total asset turnover = sales / total assets
Fixed asset turnover
Fixed asset turnover is a ratio that measures the efficiency of a company when it comes to using fixed assets to generate revenue. Some stakeholders prefer this ratio to total asset turnover.
Fixed assets turnover = sales / fixed assets
Net working capital turnover
Net working capital turnover is a ratio that shows the efficiency of a company when it comes to using working capital. The higher the ratio, the better an organization uses working capital to generate revenue.
Net working capital turnover = sales / net working capital
Inventory turnover ratio
Another ratio identified as important is a company’s inventory-to-turnover ratio. This shows how many times a company has sold and replenished inventory within a period. A higher ratio is preferred, but this can also indicate so-called stock-outs (non-deliverable items). A low ratio may indicate a slow moving stock.
Inventory sales ratio = net sales / inventory
Days sale in inventory
Another ratio that has to do with a company’s inventory is the days sale in inventory. This ratio calculates the time it takes a company to sell all of its inventory. The following applies to this ratio: the lower the number of days for empty sales, the better. But here too the following applies: there is a risk of stock-outs.
Days sale in inventory = 365 / inventory turnover
Payables turnover ratio
This ratio is about the creditors of a company. Creditors are not assets of a company. Yet they are part of the working capital. Payable revenue ratio shows how quickly a company makes payments to its suppliers for credit purchases. A high ratio means the company pays the bills quickly. A low ratio can therefore be an indication of cash flow problems. This is something stakeholders would like to know.
Payables turnover ratio = purchases / accounts payable
Now It’s Your Turn
What do you think? Do you recognize the explanation about asset management? Are you involved in AM within your organization? Does this discipline of business seem interesting to you to work in?
Share your experience and knowledge in the comments box below.
- Schneider, J., Gaul, A. J., Neumann, C., Hogräfer, J., Wellßow, W., Schwan, M., & Schnettler, A. (2006). Asset management techniques. International Journal of Electrical Power & Energy Systems, 28(9), 643-654.
- Hastings, N. A. (2010). Physical asset management (Vol. 2). London: Springer.
- Van der Lei, T., Herder, P., & Wijnia, Y. (2012). Asset management. Springer.
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Original publication date: 01/17/2022 | Last update: 05/03/2023
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