Almost every choice we make comes with an opportunity cost. The definition of Opportunity Cost as stated on Investopedia states "...the cost of an alternative that must be forgone in order to pursue a certain action." We are typically dealing with limited resources, and choosing to use them one way inevitably means forgoing the benefits of using them in the next-best way. If the opportunity cost outweighs the profits gained from using an asset in a particular manner, then your company is not necessarily losing money; however, your company is forgoing the opportunity to get more out of the asset. With the right data, you can estimate the opportunity cost of using your assets in a variety of ways. This will help you get a better sense of how much a project costs as well as helping you get more out of your assets.
The first step in determining the opportunity cost of an asset is to identify its alternative uses. In some cases, that could mean the use of an excavator in one site versus another; in others, this could mean maintaining a piece of land or building versus renting or selling it. The more options you consider, the more accurate your assessment of your operations' opportunity costs will be.
Next, you will need to valuate the alternative uses of your assets. In some cases, this data is best gleaned from your own records of similar assets' past performance. In other cases, this data can come from current research regarding different uses of assets similar to yours. At this point, you'll likely find that asset management software will come in handy for collecting data and presenting it in an easy to analyse form. Analysing the opportunity cost of alternative uses of your assets will help you make sure you're using them in the most efficient way possible.
Once you've gotten a good sense of the opportunity costs involved with your use of your company's assets, it's important to keep this valuation up to date. Technological advances and other market events may change the value of alternative uses of your assets, resulting in dramatic increases in opportunity costs which you need to be able to track. Again, asset management software provides you with an efficient means of tracking the opportunity costs of the current uses of your assets.
Staying competitive in almost every industry requires getting as much value as possible out of every asset. Recognising the opportunity costs involved with the way you use your assets is one step toward using them as efficiently as you can. Because collecting and analysing a great deal of data is important to calculating your operations' opportunity costs, asset management software is generally very helpful for this task. We at Reduxo recommend using Sprocket; its advanced reporting system can easily collect and manage the information needed to calculate and update the opportunity cost of your operations. If you don't have the resources to collect the initial asset information, we can assist with a physical asset audit.
Reduxo provides best-of-breed software solutions and services, contact us for more information about Sprocket and other services we offer.