Are you making the most of your business assets or leaving growth opportunities untapped?
Recognizing the true power of assets is pivotal to strengthening your competitive edge, fuelling profitability, and securing long-term success.
This comprehensive guide will demystify assets and asset management, uncovering how these vital components can drastically transform your business prospects.
We’ll dive deep into what “assets” truly mean for your business, their impact on your balance sheet, and their value to your financial future.
Here’s what we cover:
- What is an asset?
- Why assets are an essential component of your business
- How assets contribute to your balance sheet
- Tangible assets
- Intangible assets
- The role of assets in investing
- If you’re looking for investors, they will look at your assets
- How do you value an asset?
- Why is asset valuation important?
- What is asset management?
- Why is asset management important?
- How can you effectively manage your assets?
- The rise of digital assets
- How to adapt to digital assets
- Final thoughts on assets and asset management
What is an asset?
In its most generic sense, an asset is anything of value you possess. However, this definition narrows in accounting and finance.
Assets are the measurable resources of your business, expressed in terms of monetary value.
- Range from cash, real estate, and machinery to intangible elements like patents and trademarks.
- Must be fully owned by your business and contribute to your profitability in some way.
As we dig down into the value of assets, you’ll discover they aren’t just static elements on a balance sheet.
Assets can be dynamic and potentially powerful tools that significantly shape your company’s financial health and future.
Why assets are an essential component of your business
Assets are essential to your business, determining your value and profitability.
Assets are resources your business owns or controls, which you can use to generate revenue and create shareholder value. Examples of assets include:
- Accounts receivable
Here are some ways to use them:
- Property and equipment to produce goods or provide services, which you can sell for a profit.
- Inventory to sell to customers, generating revenue and cash flow.
- Cash and accounts receivable to pay bills and invest in new opportunities.
- Collateral to secure financing or other forms of capital, whether you want to expand operations, invest in new projects, or weather financial challenges.
How assets contribute to your balance sheet
Assets contribute to your balance sheet, a financial statement showing your assets, liabilities, and equity, at a specific time.
A balance sheet is a snapshot of your company’s financial position that can help you, investors, and stakeholders understand your financial health.
The balance sheet equation is Assets = Liabilities + Equity.
Your assets must be equal to your liabilities plus equity. Assets are on the left side of a balance sheet, while liabilities and equity are on the right.
The balance sheet equation represents a fundamental accounting principle: A company’s total assets must equal the sum of its liabilities and equity.
If the balance sheet equation is not satisfied, there is an error or discrepancy in your financial statements.
Let’s say you have the following assets, liabilities, and equity for a company.
Property, Plant, and Equipment: $200,000
Assets = Cash + Inventory + Property, Plant, and Equipment
= $50,000 + $100,000 + $200,000
Accounts Payable: $30,000
Loans Payable: $150,000
Liabilities = Accounts Payable + Loans Payable
= $30,000 + $150,000
Share Capital: $100,000
Retained Earnings: $70,000
Equity = Share Capital + Retained Earnings
= $100,000 + $70,000
To calculate the balance sheet equation, you add up the values of assets, liabilities, and equity:
Assets = Liabilities + Equity
$350,000 = $180,000 + $170,000
The balance sheet equation is satisfied, as the total assets ($350,000) are equal to the sum of liabilities ($180,000) and equity ($170,000).
Current and non-current assets
Assets are divided into 2 categories on the balance sheet:
Current assets include cash, accounts receivable, inventory, and other assets that can be converted to cash within a year.
Non-current assets include property, equipment, and other assets expected to provide value over a longer period.
The balance between assets, liabilities, and equity is important because it reflects your ability to meet your obligations and generate profits.
- You’re thought to be in a strong financial position if your business has more assets than liabilities.
- On the other hand, if your business has more liabilities than assets, you may be at risk of insolvency or bankruptcy.
You can categorize assets into 2 main types: Tangible and intangible assets.
Tangible assets are physical or material assets you can see, touch, quantify, and use to generate revenue for your business.
Consider Apple, which has tangible assets in the form of retail stores worldwide and a product inventory that includes devices like MacBooks, iPhones, and iPads. Apple’s tangible assets contribute directly to its revenue stream.
Examples of tangible assets include:
Land, buildings, warehouses, factories, and other structures your business owns or leases. You can use property assets to generate rental income or as collateral for financing.
Machinery and equipment
A business uses tools, vehicles, and other equipment to produce goods or services. These assets can depreciate over time and are often financed through loans or leases.
Raw materials, work-in-progress, and finished goods that a business has on hand or in transit. You can sell these assets to generate revenue and cash flow.
Cash and cash equivalents
Currency, coins, and other liquid assets that your business has available to use. You can use these assets to pay bills, invest in new opportunities, or pay dividends to shareholders.
Intangible assets are non-physical assets that cannot be touched or seen but still have value to your business.
Going back to the Apple example, consider its brand name, patents, and proprietary technology, which all generate goodwill and a unique customer experience.
Intangible assets include:
These are exclusive rights granted to an inventor or company to produce and sell a particular product or service.
You can use these signs or symbols to identify products or services and distinguish them from competitors.
These are exclusive rights granted to the creator of an original work, such as a book, music, or software.
You can protect your brand or intellectual property with patents, trademarks, and copyrights, but these can also be licensed or sold to generate revenue.
Goodwill is an asset measuring the value of your company’s reputation, customer relationships, and other intangible assets that contribute to its overall value.
You can generate goodwill through mergers and acquisitions or by building a strong brand and customer base.
The role of assets in investing
Assets play a significant role in investing. The value and nature of your assets can greatly impact your perceived value and, consequently, the value of your stocks and bonds.
Stocks are a company’s ownership units representing a claim on its assets and earnings. When investors choose to invest in your stock, they essentially purchase a portion of your ownership.
This is why your assets are so important—they contribute to determining the overall value of your company and hence, the value of your stock.
To assess your financial health and growth potential, investors will evaluate your company’s assets, including property, equipment, inventory, and cash.
Bonds are debt securities governments, municipalities, or corporations issue to raise capital. When investors buy a bond from your company, they lend you money.
You promise to repay the bond’s face value at a specific date (the bond’s maturity), plus regular interest payments.
While the bondholders don’t have an ownership stake in your company like stockholders, they have a higher claim on your assets and earnings.
Therefore, before buying bonds, investors will also evaluate your assets, liabilities, and overall financial health to assess your ability to meet your bond payment obligations.
If you’re looking for investors, they will look at your assets
The value of your assets is an important factor in determining your ability to repay your debts.
If you’re looking for business investors, they will look at your assets, such as property, equipment, and cash, to assess your ability to generate cash flow and meet your debt obligations.
Your assets can influence investor decision-making.
- If you have strong assets, you’re generally seen as financially stable
There’s less risk for an investor than a company with weak assets. Investors are looking for stable, long-term investments.
- Your assets can influence your ability to generate revenue and profits
If you have valuable patents or trademarks, you may be able to charge higher prices for your products or services, leading to higher revenues and profits.
Similarly, if you have valuable property or equipment, you may be able to produce goods more efficiently, leading to higher profits.
- Your assets will influence your ability to raise capital
If you have valuable assets, you can use them as collateral to secure financing or other forms of capital. You can expand your operations and invest in new projects in good times or weather financial challenges in the bad times.
How do you value an asset?
Asset valuation is the process of determining the value of your assets. You can use different methods to value assets, such as:
- Cost approach
Value an asset based on the cost of acquiring or producing it, adjusted for depreciation or obsolescence.
- Market approach
Value an asset based on the price it would fetch in the open market based on comparable sales or transactions.
- Income approach
Value an asset based on the income it generates, using measures such as net present value or discounted cash-flow analysis.
- Replacement cost approach
This method involves valuing an asset based on the cost of replacing it with a similar asset, adjusted for depreciation or obsolescence.
The choice of valuation method depends on the type of asset being valued, as well as the purpose of the valuation.
Asset valuation example and calculation
Let’s use a simple example of a cost approach, specifically straight-line depreciation.
Straight-line depreciation is the most commonly used method of allocating the cost of a tangible asset over its useful life. This method spreads the cost evenly across each year of the asset’s lifespan.
Straight-line depreciation is easy to calculate and understand. But it may not always reflect an asset’s actual wear and tear, especially if it depreciates more in its earlier years of usage.
Here’s the basic formula for straight-line depreciation:
Depreciation Expense = (Cost of Asset minus Salvage Value) / Useful Life of Asset
Suppose a local bakery purchased an industrial oven for $5,000 5 years ago. If this oven has a 10-year useful life with no salvage value, the depreciated value (using a cost approach) would be $2,500 today.
Here’s how we got to that figure.
If you bought the oven for $5000, has a useful life of 10 years and has no salvage value ($0), the annual depreciation would be:
Depreciation Expense = ($5000 – $0) / 10 = $500
This means the oven would depreciate in value by $500 each year.
After 5 years, the accumulated depreciation would be $500 x 5 = $2500.
Hence, after 5 years, the oven’s book value (original cost minus accumulated depreciation) would be $5000 – $2500 = $2500.
Why is asset valuation important?
- Accurate asset valuation helps you make informed decisions
Asset valuation will give you crucial information when making investments, looking for financing, or conducting other strategic initiatives.
By knowing the value of your assets, you can determine the best use of them and make decisions that maximize their value.
- Accurate asset valuation is important for investors
Investors rely on accurate asset valuations to make informed decisions about buying, selling, or holding stocks and bonds.
- Accurate asset valuation is important for creditors
Creditors rely on accurate asset valuations to determine the amount of collateral they can provide for you through a loan or other form of financing.
What is asset management?
Asset management is about managing your assets to maximize their value and minimize risk.
This involves identifying, acquiring, maintaining, and disposing of assets to align with your company’s strategic goals and financial objectives.
Why is asset management important?
Here are some reasons to focus your business on asset management.
- Maximize profitability
You can increase revenue, reduce costs, and improve profitability by effectively managing your assets.
For example, if you own a hotel chain, you might employ asset management principles by regularly performing maintenance on your properties to ensure they remain attractive and functional for guests.
You might then strategically invest in properties in emerging tourism markets to grow your assets and increase future revenue.
- Reduce risk
Effective asset management can help you identify and mitigate risks associated with assets, such as depreciation, obsolescence, or theft.
- Improve decision-making
By clearly understanding the assets and value of your business and others, you can make informed decisions about investments, financing, and other strategic initiatives.
How can you effectively manage your assets?
Here are 5 tips on effectively managing your business assets.
- Conduct regular asset audits
Regular asset audits can help you identify and track your assets and any potential risks or opportunities for improvement.
- Implement asset-tracking software
This can help you keep track of your assets in real time, making it easier to manage and maintain them.
- Develop a maintenance plan
Developing a maintenance plan for assets can help you extend their useful life and reduce the risk of breakdowns or failures.
- Consider leasing or renting assets
Leasing or renting assets can be a cost-effective way to access the assets you need without purchasing them outright.
- Dispose of assets properly
Properly disposing of assets can help you avoid legal or environmental liabilities and recover residual value.
The rise of digital assets
We are seeing the emergence of new types of assets, such as digital assets, that are fundamentally different from traditional physical assets.
Digital assets are intangible assets that exist only in digital forms, such as cryptocurrencies, digital art, and virtual real estate. Physical boundaries do not bind digital assets so they can be easily transferred and replicated.
This has implications for how we value and manage assets, as well as how we regulate and govern them.
Bitcoin is one of the most recognized digital assets. It is an alternative store of value, and the ease of its transaction globally is one reason for its significant appreciation in value in the last few years.
How to adapt to digital assets
To adapt to this new asset landscape, you must take a proactive approach to digital asset management.
- Embrace digital technologies
Stay competitive and relevant in the new asset landscape. Look at investing in technologies such as blockchain, artificial intelligence, and the Internet of Things, which can help you manage and secure digital assets.
- Develop new asset management strategies
Consider the unique characteristics of digital assets. This includes developing new valuation methods, risk management strategies, and governance frameworks.
- Collaborate with regulators
As digital assets are still a new and evolving asset class, you must collaborate with regulators to develop clear and effective regulatory frameworks. Digital assets should be properly valued, managed, and governed.
- Build trust with customers
Build trust with your customers by providing clear and transparent information on digital assets. Help customers understand the risks and benefits so they can make informed decisions.
Final thoughts on assets and asset management
Understanding and strategically managing assets is beneficial and fundamental to your business’s success and longevity in a rapidly changing economic environment.
The strategic management of tangible or intangible assets is key to driving your company’s value and growth. Assets can help you generate revenue, secure financing, and influence investor decision-making.
Asset management isn’t merely about possessing resources; it’s about understanding, tracking, valuing, and using them in the most profitable way possible.
Additionally, emerging new asset types, like digital assets, present exciting opportunities and challenges. The landscape is constantly evolving, so adapt and innovate.
You can navigate this digital asset landscape by embracing technology, developing fresh asset management strategies, building customer trust, and working with regulators to maximizing overall value.
Regardless of where your company is on its business journey, it’s essential to continuously assess your assets, their value, and how they’re managed.
Recommended Next Read
What are the expansions in today's SaaS CFO's responsibilities?