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Establishing and developing a company requires a far-sighted capital strategy from the outset. At the heart of this is the trade-off between securing business operations through investment and maintaining financial flexibility.
Asset-light strategy: How to optimize your capital in the long term
Changing challenges due to increasing digitalization and growing competitive pressure as a result of globalization place additional demands on flexibility. Last but not least, economic crises (this article was written during the global coronavirus pandemic in 2020) show us the great importance of secure liquidity in order to remain capable of acting.
What is behind the Asset Light strategy?
One question that concerns every company is where and to what extent asset ownership is necessary and sensible for a company. There is no definitive "right" or "wrong" answer. Rather, the optimal ratio of own assets to outsourced assets depends on the business model and can vary depending on the industry. In recent years, however, there has been a clear trend towards the so-called asset-light approach.
Definition - What is asset-light?
Asset light" is essentially a business model strategy and the question of how a company prepares and optimizes its balance sheet. A company is therefore "asset light" if it has (relatively) little ownership of assets, i.e. has only a small amount of fixed assets on its balance sheet. The asset-light strategy is particularly common among companies in the service sector, which in principle require little capital for their business operations. The best-known examples include well-known companies such as Airbnb and Uber or providers of co-working spaces such as WeWork.
Another well-known example of the asset-light approach is Apple, which outsources numerous areas that require high investments (production facilities, personnel) to third parties.
Comparison: Asset Light vs. Asset Heavy
More ownership of assets (asset heavy approach), e.g. production facilities, gives a company more control over these assets, which prevents knowledge ("intellectual property") from being passed on to external parties. On the other hand, such ownership ties up the company's capital ("working capital") on a massive scale, which consequently cannot be used for other purposes.
This gave rise to the asset-light concept. Companies with reduced working capital are usually much more flexible financially and can therefore react more quickly to changes. In addition, secure liquidity is necessary to bridge times of crisis.
The asset-light approach also offers a number of other advantages compared to the asset-heavy approach:
Scalability
When using own assets, production can only be increased up to the capacity limit. Further growth is only possible through extensive investment in production facilities and infrastructure, which in turn increases fixed costs and ties up capital. Provided that the external partner guarantees the increase in capacity at all times, the company's turnover can be increased (scaled) as required when outsourcing. Appropriate contract design and entrepreneurial foresight are essential. However, this also enables financial security in critical times, as variable production capacities can be flexibly reduced as a variable cost component.
Profit distribution
Scalable business models also offer growing profitability with increasing turnover. They are therefore of particular interest to investors, as increasing profitability also means increasing profit distribution.
Knowledge aggregation
Asset-light companies concentrate only on their core business and outsource non-core activities to external partners. As a result, they also benefit from external expertise in many non-core areas that the company itself could not achieve to the same extent in these areas.
How does my company become asset-light?
In general, the transformation from asset-heavy to asset-light means that companies replace tied-up capital (long-term fixed assets or capital expenditure - CAPEX) with flexible, ongoing operating expenditure (OPEX). These operating expenses can be quickly adjusted (reduced or increased) and are also 100% tax-deductible. In the case of CAPEX, only depreciation is tax-deductible, which is often lower than the corresponding OPEX.) In the event of a crisis, it is also difficult to liquidate them and make the tied-up capital available.
Why a shift from CapEx to OpEx is worthwhile for your company!
What asset-light models are available?
If you want to switch to a (partial) asset-light strategy, the question arises as to how a transformation is possible. The advantages and disadvantages of 3 common models are explained below.
1. leasing
With classic leasing, high initial investments are avoided through long-term financing. Instead, the assets are usually financed over several years through fixed monthly installments.
- The advantage of leasing is that companies 1) avoid tying up a lot of capital through investments and 2) spread the financial burden over a long-term period.
- A disadvantage, however, is the lack of flexibility in the contract design. Leasing contracts have a fixed term and the lessee has no flexible option for early termination. This means that a company cannot react flexibly to its own requirements or economic conditions, e.g. crises. In addition, the leased items must be capitalized in the balance sheet and only the depreciation (the loss in value) can be claimed for tax purposes. Strictly speaking, leasing is therefore more of a financing vehicle than asset-light financing in the true sense of the word.
2. sale-and-lease-back
Sale-and-lease-back is a sophisticated variant of leasing. In this approach, the company's own assets (e.g. buildings, production facilities) are sold. The buyer then becomes the leasing provider, from whom the assets are leased back over several years.
- The major advantage here, even compared to normal leasing, is a high one-off cash inflow from the sale, which initially leads to increased liquidity. Depending on the asset, the leasing installments are financed over a long period of time and keep the financial burden at a constant low level.
- The disadvantage remains that - similar to the simple leasing approach - ownership of the leased asset is transferred to the lessee, who is therefore considered the owner. You only benefit from this model if you already own assets that you can sell and then lease back. Instead of real flexibility, this approach is also more of a financing approach and less of a measure to become truly asset-light.
3. rents
Although renting is well known in the business environment, it is usually limited to premises and real estate. You pay a usage fee (usually monthly) to the owner in return for the use of the rented property. In recent years, there has been a clear trend towards the rental model becoming established in many other areas of application. Renting is a very effective way of making your own business model asset-light.
The advantages of the rental model are manifold:
- Investment avoidance: High initial investments can also be avoided when renting. Expensive systems and equipment can be provided cost-effectively and promptly.
- Low financial burden: Instead, regular installments have to be paid for the use of the assets, resulting in a low monthly burden on cash flow.
- Maximum flexibility: As a rule, it is also possible to terminate the lease flexibly and thus react quickly to growing or declining demand. Leased assets are not owned, which is why they do not need to be capitalized in the balance sheet.
- Tax advantages: The rents paid can be claimed 100% as current operating expenses for tax purposes. In many cases, this is more relevant than any depreciation, which, according to the depreciation tables for furniture, for example, can be divided and claimed on a straight-line basis over 13 years.
However, depending on strategic importance or availability, it can be a disadvantage that the tenant does not acquire legal ownership of the assets. Consequently, there is no control over the goods beyond the agreed purpose of use.
For which assets is the asset-light strategy suitable?
A company-wide asset-light strategy is not suitable for every industry. For telecommunications companies, for example, extensive ownership of assets is essential, as operating the network infrastructure is their core business and a driver of profitability. Nevertheless, it is possible to reduce the proportion of owned assets in individual areas.
To answer the question of which assets a company should and should not own, the experts at BCG have developed two simple guiding questions to help select the right assets:
Translated, this means that goods and assets that are essential for securing competitive advantages should generally be owned by a company itself. These are usually an integral part of the core business and ownership can therefore be important here to minimize business risks. The same applies to goods that are rare and therefore difficult to procure. If the answer to both of these questions is ", an asset-light strategy is possible and makes sense.
Example: Office equipment
An illustrative example of assets that are neither strategic nor difficult to procure in companies is office equipment. If the company is not active in the office equipment market, furniture and IT equipment for employees are essential for the business, but are not strategically valuable and are also easy to procure. In addition, the purchase of new equipment is initially associated with high investments.
Furniture rental is a suitable way of implementing such an asset-light strategy with regard to office equipment.
Scenario 1: A start-up from Berlin buys new workstations for its 100 employees and pays 2,000 euros per employee for this furniture. The company thus spends 200,000 euros in one go.
Scenario 2: The same startup rents the office furniture and thus spreads the costs over a period of two years. The company only pays 100 euros per employee per month.
Very high initial investments (scenario 1) are offset by low monthly rental expenses (scenario 2), which can be covered by the monthly income. On day one of the decision, the company has liquid funds of € 198,000, which can be used to increase the core business.
For many companies, the asset-light approach is the right decision. Companies become more flexible, can increase their sales and secure liquidity even in times of crisis - decisive advantages in an increasingly competitive global market.