They say that death and taxes are the only two certainties in life. Perhaps “they” should add a third: depreciation.
Depreciation isn’t just an entry that accountants like to add to your balance sheet. It’s something that results from the fundamental properties of reality and the structure of the universe. As entropy increases, your equipment wears out. It’s something that’s been going on since the beginning of time. And it will continue to do so for as long as we’re around.
Fortunately, nature doesn’t always have the upper hand. It turns out that there are ways that you can slash your deprecation expenses and cut your capital expenditure.
Here’s what to do:
Increase The Salvage Value
Let’s say that you run a mine or a farm. Eventually, the plant and machinery you use will wear out and won’t have much value to anyone. It’s too old and rusted to attract interested buyers.
Usually, at this point, your accountant will give it a “salvage value” – what you can sell it for at the end of its useful life. Thus, the depreciation expense you face is the average decline in value from what the asset is worth now to what it’ll be when you sell it.
And here’s where the magic comes in. If you can find a way to increase your assets’ salvage value, you can reduce the rate of depreciation.
And how do you do that? Easy – just focus on restoration. Remember, the sandblasting of mining or agricultural machinery helps to get rid of rust and marks, making it look pretty much good as new. Often all you need to do is change a couple of internal components, and you can keep on using the equipment. Or if you don’t need it, another firm will be happy to pay a premium for it.
Increase Your Maintenance
While assets will inevitably lose function over the course of their lives, good maintenance can slow this process down tremendously. We’re not just talking about lubricating the gearing, either. Today’s maintenance technology is much more sophisticated.
For instance, predictive analytics now means that your business can work out where and how failures are likely to occur. Knowing this, you can sweep in ahead of time, fix the maintenance issue at a low cost, and avoid interruptions in your workflows.
Change How You Depreciate
If you need to rapidly cut your depreciation expense, you might also be able to change how you’re depreciating your assets by considering your assumptions.
Most organizations use “straight line” depreciation, which spreads the expense evenly over the asset’s life. In general, this is the cheapest.
However, the depreciation curve of an asset might not be linear. For instance, market values might indicate that it depreciates slowly over the first few years of use and then rapidly afterward.
If you notice this kind of trajectory, you might be able to take advantage of it. You could report the actual deprecation for the specific year instead of just relying on your depreciation assumptions.
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