Prioritized Long Range Asset Replacement Plan
Phil Kenkel
Bill Fitzwater Cooperative Chair
Marketing and farm supply cooperatives are asset intensive businesses. Most cooperative boards
set a capital expenditure budget on an annual basis. The manager attempts to work within the
budget making the specific decisions on asset replacements. Here are a few ideas to improve the
process. First, develop a capital asset committee of the board. The committee should work with
appropriate staff and management to develop a five year capital asset replacement plan.
Developing the first five year plan is a labor intensive process. Subsequent plans are much
easier.
The five year plan should lists all of the major equipment and facility assets, estimates the
remaining life and the current replacement costs. The plan should provide a schedule for
replacing the assets that will near their useful life during the planning period. The plan should
include a priority rating which distinguishes between needs (critical assets, safety and regulatory
compliance items) and wants which may include revenue enhancement or cost reducing
investments. It should also indicate whether additional analysis such as an engineering study,
detailed cost quote or outside feasibility analysis is needed. The 5 year plan can then be updated
each year as capital asset replacements are made or when purchases are delayed for budgetary
reasons.
A systematic, multi-year plan has several advantages. The process ensures that needs are
consistently reviewed across all departments and locations. Information in the plan on the
current replacement costs of each asset and the useful life of a replacement asset can be used to
estimate the total “economic depreciation”. Economic depreciation may be quite different from
the accounting depreciation which you are using for tax purposes. On average, cooperatives
must reinvest an amount equal to their economic depreciation unless they plan on reducing their
asset base. Your cooperative can do anything, but not at the same time. Set your priorities not in
terms of what you will do, but in when you will do them.
1-21-2010