In this summary, we explain what assets are in a business context, and how you can use them to keep your company financially healthy.
- Asset definition
- Why are assets important
- Types of assets
- How to categorize an asset
- Assets versus liabilities
- How to use assets
An asset is any measurable resource your company owns that can be expressed as a monetary value. In other words, anything that can be bought or sold, and that contributes to profitability can be considered an asset.
Some of the most common asset examples are:
- Checking and savings accounts
- Accounts receivable
- Profitable investments
- Buildings and structures
- Intellectual property
Why are assets important?
Knowing the assets your company has at any given time is essential for understanding its financial position. It allows you to quantify your resources in financial terms, helping you make decisions more confidently.
Types of assets
As you can see in the examples above, there are many types of assets. To truly understand your financial position, you’ll need to examine these all, as they each bring different considerations.
How to categorize an asset
To determine the value of your assets, figure out how much finance you have access to in the next year, and assess your potential future profitability, you can sort them into categories.
For each asset, simply ask these 3 questions:
1. Is the asset a physical item?
Physical items, such as stock, buildings, equipment, and vehicles are called tangible assets.
Non-physical items, such as stocks, bonds, and patents, are called intangible assets.
2. Could the asset be converted into cash within a year?
Any item that you could sell and receive payment for within a year is considered a current asset.
Any item that would take longer than a year to turn into cash is considered a non-current asset.
3. Is the asset used for primary business operations?
If an item is necessary for your main operations, it’s an operating asset.
If removing an item wouldn’t affect your main operations, it’s a non-operating asset.
Being able to see how many tangible or intangible, current or non-current, and operating or non-operating assets you have will show how your company finances are doing, beyond just the numbers in the bank.
You’ll be able to spot imbalances, such as a lack of current assets, which you can work to correct and make your business more stable.
Assets versus liabilities
You’ll often hear the term “asset” alongside “liabilities”. This is because they have opposing effects on your business.
Assets contribute positively by potentially generating income or appreciating in value. Liabilities represent financial obligations that will lead to outgoing cash, such as mortgages, loans, and accounts payable.
By understanding both your assets and liabilities together, you can get an accurate idea of the financial health of your business, which helps you make better decisions, and manage your finances more effectively.
A key financial report is the balance sheet, which show assets, liabilities, and equity in a single view.
How to use assets
Once you have a good understanding of your assets and have them neatly categorized, you can start to use this knowledge to your advantage.
Here are 7 ways to use assets:
1. Strategic investments:
- Identify opportunities to strategically invest in new assets that align with your business’ goals and growth plans.
- Evaluate the potential return on investment (ROI) of different assets to make informed decisions about where to allocate resources.
2. Risk management:
- Diversify asset holdings to spread risk and minimize your exposure to economic fluctuations or challenges in your industry.
- Regularly assess the risk associated with each asset class and adjust the portfolio to align with changing market conditions.
3. Optimize your capital:
- Balance the mix of debt and equity by considering the impact on your company’s overall financial health.
- Use assets as collateral for loans, potentially securing favorable financing terms to support business operations or expansion.
4. Cash flow management:
- Monitor the liquidity of assets to ensure the business maintains enough cash flow for day-to-day operations.
- Identify opportunities to convert non-liquid assets into cash when needed, optimizing the working capital cycle.
5. Financial reporting and analysis:
- Use asset information for accurate financial reporting and analysis.
- Regularly review the balance sheet to assess the value, depreciation, or appreciation of assets, providing insights into overall business health.
6. Long-term planning:
- Incorporate knowledge of asset values and trends into long-term strategic planning.
- Consider the lifecycle of assets and plan for replacement or upgrades to keep operations efficient.
7. Tax planning:
- Leverage tax incentives related to specific assets, such as depreciation allowances, to optimize tax liabilities.
- Stay informed about changes in tax regulations that may impact the treatment of certain assets.