Understand Deeply the Assets that Affect Your Business
Asset means anything of monetary value owned by an individual or business.
A business asset is a resource that has an economic value for a company and which can be used in the current or future time period to generate revenues.
Examples of business assets are:
- Cash and cash equivalents
- Property, plant and equipment
- Inventory
- Investments
- Furniture and fixtures
- Patents, copyrights and trademarks
Properties of an Assets:
There are 3 key essential properties of a business asset:
- Ownership:
Assets that carry ownership and can be eventually turned into cash and cash equivalents - Economic Value:
Assets that carry economic value & can be exchanged or sold - Resource:
These assets are basically those resources which can be used to generate future economic benefits
Classification of assets:
Business Assets can be classified into 3 categories:
- Convertibility:
Classifying assets based on how quickly they can be converted into cash. - Physical Existence:
Classifying assets on the basis of their physical existence i.e. tangible or intangible. - Usage:
Classifying assets on the basis of their business usage or purpose.
1. Convertibility:
Classifying assets based on how quickly they can be converted into cash i.e. short-term assets and long-term assets.
- Short-term Assets
= Assets that you expect to sell or convert into cash, within 1 year.
– Cash
– Marketable securities ’ traded investments easily convertible to cash
– Trade accounts receivable (Debtors + Bills receivable)
– Prepaid insurance
– Inventory
- Long-term Assets = assets that will not get converted into cash in 1 year, and provide long-term value to your business.
– Fixed Assets: machinery, equipment, furniture, buildings, land, etc.
– Investments: similar to fixed assets; long-term investments, not to be sold within 1 year
– Franchise rights, patents, copyrights, trademarks, goodwill, etc.
2. Physical Existence:
On the basis of physical existence, assets can be classified as: tangible and intangible assets.
- Tangible Assets
= assets which can be seen, touched i.e. having physical existence
– Land
– Building
– Machinery
– Cash
– Furniture & Fixtures
– Office equipment
- Intangible Assets
= assets which can’t be seen i.e. which don’t have physical existence
– Goodwill
– Patents
– Brand
– Copyrights
– Trademarks
– Corporate intellectual property
3. Usage:
On the basis of their usage, assets can be classified as operating and non-operating assets.
- Operating Assets
= assets required in the daily operations of business i.e. assets which are used to generate revenue from company’s core business activities.
– Cash
– Stock
– Building
– Machinery & Equipment
– Patents & Copyrights
– Goodwill
- Non-operating Assets
= assets which are not required in daily operations of business but still generate revenue for business.
– Short-term investments
– Marketable securities
– Vacant land
– Interest income from a fixed deposit
Why are these assets so important for any business?
Assets are important for any type of business due to the following reasons:
- Generating revenue
- Increasing the value of your business
- Facilitate the running of your business
You can transfer or sell assets, use them to lower your tax liability and in turn increase the efficiency of your business.
A good understanding of assets in business can help you achieve potential savings in your business.
For example:
In some cases leasing an asset in a business, such as a machinery, can be way more cost-effective than buying one.
Intangible assets such as patents, copyrights and trademarks help in protecting your business against infringement.
Learning about assets in business is a must for every entrepreneur. The efficient management of assets in a business is absolutely critical, as errors can lead to inefficient decision-making, incorrect tax reporting and inaccurate valuation of your business.