Fixed assets are essential to the operation of virtually every kind of business—if you’re running a small-to-midsize business, you probably have at least one fixed asset. Here’s what fixed assets mean and why they matter for small business owners.
What is a fixed asset?
Fixed assets are items a company buys with the knowledge they’ll own for more than a year. In even plainer language, fixed assets are things you can see and touch that your business plans to hold and use for a while.
Fixed assets are often referred to as property, plant, and equipment, or PPE—the three most common kinds of fixed assets. For example, the fixed assets of a frozen cookie dough manufacturer might include a corporate office (property), a cookie dough factory (plant), and machines that make cookie dough (equipment).
Fixed assets are also known as non-current assets—assets that can’t be easily converted into cash. Non-current assets can be intangible assets, like investments and intellectual property, as well as real estate and equipment. (In contrast, current assets are short-term assets that a company expects to use up, convert into cash, or sell within a year, like cash, cash equivalents, stock, or inventory.)
Note that one company’s fixed asset might not count as a fixed asset for another company. For instance, a cybersecurity company might list computer equipment as a fixed asset. In contrast, an office supply business that sells computers wouldn’t, because the computer equipment, in this case, is the merchandise.
Depreciation of fixed assets
Because most fixed assets depreciate (ie, decrease in value) over time (except land and real estate, which often hold or even increase in value over time), fixed assets can pose a bit of a problem on your company’s balance sheet. You don’t want to have a massive bump in the value of your assets one year, only to have it drop suddenly the next, setting off the balance of your book value.
Instead, you can list fixed assets as line items over the period you own them. For example, a frozen cookie dough manufacturer might need a new industrial dough mixer—not a cheap investment—which would throw off their balance sheet if it were only listed for the year they buy it.
Rather, the cookie company can estimate how much the mixer depreciates yearly due to normal wear and tear. They can then spread these numbers across the period they think they’ll use the mixer—perhaps over the next five years. This reflects the mixer’s actual value to the company each year and prevents an imbalance that could give an inaccurate picture in their financial reporting.
How do companies use fixed assets?
You can use fixed assets for many different business purposes. Use tend cases to fall under the following three categories:
1. Goods production
If a company makes and sells something, they have fixed assets they use to produce the goods. For example, for a coffee roasting company, a major fixed asset is their roaster, which it uses daily to roast their carefully sourced coffee beans. Other examples of fixed assets used for the production of supply or goods include:
- A small fashion brand’s sewing machines
- A furniture maker’s table saw
- A tattoo artist’s tattoo gun
- A maintenance person’s pickup truck
- A content marketing agency’s computers
- A food production company’s small factories or plants
2. Third-party rentals
While some businesses use their fixed assets, other businesses’ cash flow might rely on renting out their fixed assets to third parties. For example:
- A real estate company owns several buildings and leases out space to third-party renters.
- A car company sells cars but also leases them out to customers.
- A farmer rents out a barn on their land for weddings.
Finally, almost all companies have some fixed assets they use to organize their business operations—perhaps to facilitate transactions, expedite work, or protect other assets. For example, the operational fixed assets of a tiny home goods store likely include a point-of-sale system, computers for owners and buyers, and a security system for the storefront.
Advantages of fixed assets
Fixed assets are generally very advantageous for businesses. For example, an artisan jewelry company can’t produce goods without a soldering gun. Significant advantages of owning fixed assets are:
- They provide long-term income.A successful long-term business needs fixed assets to provide income over an extended period—whether these assets are computers, buildings, vehicles, or equipment.
- They help you run operations. These days, the world runs on computers. For most businesses, fixed assets like computers and other technology are essential to ensuring smooth and efficient operations.
- They don’t always depreciate.Most fixed assets depreciate over time, but not necessarily all of them. Land and real estate, for example, tend to either hold their value or even increase in value (barring any disasters, of course.)
Disadvantages of fixed assets
Fixed assets also come with disadvantages, including:
- Value depreciation.Most fixed assets depreciate over time. Think of your car, for example—it lost value as soon as you drove it off the dealership’s lot. The same applies to business assets: In a few years, a delivery vehicle likely won’t be worth its original value. But that doesn’t mean it doesn’t have any value. Instead of thinking of its value in terms of how much money you could resell it for, think of its value as how much money its use brings into your business.
- Large investments. Everything in the categories of property, plant, and equipment, or PPE, will set your business back a lot financially. The key is ensuring that the long-term return on investment outweighs the initial cost. For example, if an espresso machine costs your company $10,000 but it’s able to make $200,000 worth of espresso over its lifetime, the return on the investment outweighs the original cost.
Fixed assets FAQ
What are the types of fixed assets?
Fixed assets usually fall under the umbrella of PPE, ie, property, plant, and equipment. These are the three main types of fixed assets.
What are some examples of fixed assets?
Examples of fixed assets include land, machinery, vehicles, furniture, computer equipment, buildings, and other equipment. Fixed assets differ based on a company’s business operations.
What are fixed asset liabilities?
Fixed asset liabilities are the debts on fixed assets. For example, if you own a factory thanks to financing from the bank, your fixed asset liability is the money, you still owe on the mortgage.