Why Do "Selling Opportunities" Occur?
A "selling opportunity" is one of the big payoffs of using the MakeLifeEasy's M-V-S feature.
A selling opportunity occurs when your cost of owning an asset is higher than your benefit.
Here are some reasons why this can happen. You can use either total values or "per month" values.
The terms and abbreviations are explained in the subsequent sections.
- You don't need the asset anymore, for whatever reason.
[In this instance, BPTP goes to zero, as does the BT. ]
- You don't need the asset as much anymore.
[In this case, the BPTP decreases, as does the BT.]
- The market value of the asset stays firm or increases.
[In this case, CPTP increases, as does CT.]
- You need more cash.
[In this case, your decision (CT-BT) threshold decreases.]
- You change your personal philosophy (of owning assets); to wit, you want to own less.
[In this case, your decision threshold decreases.]
- You overbuy some assets.
[In this case, the BPTP decreases, as does the BT.]
- An asset's lifetime decreases.
[In this case, the BT decreases.]
There are many ways to measure benefit and cost,
and the basic M-V-S concept is intended to accommodate a variety of measures.
MakeLifeEasy uses some simple heuristics to quantify both, as described next.
Calculating Benefits
When you first buy an asset, its total benefit (BT) is calculated to be
its acquisition cost (AC)
minus any disposal value (DV)
you expect to receive at the end of the asset's useful life (to you).
That is:
BT = AC - DV
This makes sense, since if you didn't receive at least this minimum benefit,
you would not have purchased the asset.
An initial average daily benefit (benefit per day or BPD)
can be derived from the total benefit and the asset's
initial expected lifetime or days left (DL) as follows:
BPD = BT/DL
Benefits per other time periods, such as benefit per month (BPM) can be easily calculated,
e.g. BPM = BT/(DL/30). Sometimes the general term "benefit per time period" (BPTP) is used.
In MakeLifeEasy, the benefits calculations proceed as follows during the lifecycle of an asset:
- When you first acquire an asset, BT is calculated as BT = AC - DV.
- At this same time, BPD is calculated as BT/DL.
- At any point during the asset's ownership,
you may re-assess the BPD received from the asset.
You could determine this new assessed value using support from several sources,
including ranking vs. other assets' BPDs, a subjective estimate, an objective calculation, etc.
If you determine a new BPD for the asset, you enter that BPD in MakeLifeEasy
using one of the provided interfaces, such as the Asset Properties page or the Saleable Assets report.
- You may also re-assess the asset's lifetime and update the value in MakeLifeEasy using
the Asset Properties page or the Saleable Assets report.
- Then, if either the BPD or DL is updated,
MakeLifeEasy recalculates the asset's BT as BT = BPD * DL.
However, since the asset's lifetime may be underestimated,
and the DL may become 0 or negative in the MakeLifeEasy database,
resulting in a zero or negative (and therefore inaccurate) BT,
MakeLifeEasy uses a simple rule to avoid this, namely,
the time period value used in the denominator may never be less than zero,
so that the last BT calculation above is made as follows:
BT = BPD * Max(DL, 0)
Note that business organizations may be able to assign a more explicit, objective,
operational, and/or specific value for BPD.
For example, a piece of machinery may contribute a specific daily dollar value to a production process.
In cases like this, this more specific value may be used for the BPD.
Calculating Costs
Initially, the total cost of an asset is its purchase price,
plus any costs associated with the purchase, such as transaction costs, shipping, taxes, setup costs, etc.
However, in MakeLifeEasy, once the asset is purchased and owned,
the acquisition costs are "sunk", and "cost" takes on a different meaning:
the "cost" becomes equal to the opportunity cost of owning the asset,
versus selling the asset and collecting the net proceeds.
The cost may also include maintenance, repair, and operation costs,
though these are not currently accounted for in MakeLifeEasy.
Note that this is but one way to conceive of and measure cost,
and other ways may be appropriate that are consistent with the basic premises.
Using this measure, total cost (CT) of an asset is calculated as the asset's market value (MV)
minus any disposal value you expect to receive at the end of the asset's useful life to you.
That is:
CT = MV - DV
At any point in time, a Cost Per Time Period (CPTP), such as the Cost per Day (CPD),
Cost per Month (CPM), or cost per Year (CPY) can be calculated, e.g.:
CPD = CT / DL
CPM = CT / (DL / 30)
However, since the asset's lifetime may be underestimated,
and the DL may become 0 or negative in the MakeLifeEasy database,
resulting in a very high or negative (and therefore inaccurate) CPTP,
MakeLifeEasy uses a simple rule to avoid this, namely,
the time period value used in the denominator may never be less than one,
so that the calculations above are made as follows:
CPD = CT / Max(DL, 1)
CPM = CT / Max( (DL / 30), 1)
Determining Market Value
Market value is often used to determine CT and CPTP values.
In MakeLifeEasy, market value may be obtained from one of several sources.
Some sources are more suitable for certain asset types than others.
MakeLifeEasy will provide the following available sources of an asset's market value:
- Accounting Measures.
An accounting measure may be used to estimate an asset's value.
One that may be commonly used in MakeLifeEasy for new assets is "subtract 20% from the asset's AC,
then depreciate using straight-line (or accelerated) depreciation over the customer's
expected lifetime of the asset down to the DV".
For assets purchased "used" from previous owners (not "new"), the same method is used,
but without first subtracting 20% from the AC.
- (Coming soon) Additional market value sources will become available.
Handling Asset Expiration, Inaccurate Lifetime Guesses, and Lifetime Changes
Note that in many cases you may simply guess at the asset's remaining useful lifetime,
though this value may be important in the determination of the asset's cost and benefit.
However, MakeLifeEasy is not overly sensitive to these guesses;
indeed, it can be self-correcting.
As an asset's remaining lifetime approaches 0 (DL -> 0):
- BPD stays constant, so BT approaches 0 since BT = BPD * Max(DL, 0)
- CPD approaches CT, since CPD = CT/ (Max(DL, 1)
Therefore, both CT/BT and CPD/BPD tend to become large
and an expiring asset will rise to the top of an asset list sorted by cost/benefit.
Your attention will be directed to this asset,
which will tend to trigger an action by you,
such as (a) a correction of the asset's lifetime value or (b) a disposal of the asset.
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