We explain what assets are in a business context and how to use them to keep your company financially healthy.
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Asset definition
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 contributes to profitability can be considered an asset.
Some of the most common asset examples are:
- Cash
- Checking and savings accounts
- Accounts receivable
- Profitable investments
- Stocks
- Bonds
- Patents
- Trademarks
- Property
- Buildings and structures
- Vehicles
- Equipment
- Intellectual property
Why are assets important?
Knowing your company’s assets 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, many types of assets exist.
To truly understand your financial position, you must examine them all, as they 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, ask these 3 questions:
1. Is the asset a physical item?
Physical items like stock, buildings, equipment, and vehicles are tangible assets.
Non-physical items, such as stocks, bonds, and patents, are 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.
Seeing 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, such as mortgages, loans, and accounts payable, represent financial obligations leading to outgoing cash.
Understanding your assets and liabilities can give you an accurate idea of your business’s financial health.
This helps you make better decisions and manage your finances more effectively.
A critical financial report is a balance sheet that shows assets, liabilities, and equity in a single view.
How to assets work
Once you understand your assets well and neatly categorize them, you can 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.
Automated asset management solutions
Automated asset management solutions can significantly enhance the efficiency and accuracy of managing your company’s assets.
These solutions provide real-time tracking, reporting, and analytics, allowing for better decision-making and streamlined operations.
Asset FAQs
Is accounts receivable an asset?
Yes, accounts receivable are considered current assets as they represent money owed to your business that is expected to be received within a year.
What are considered assets?
Assets include anything your company owns, ranging from cash and accounts receivable to property, equipment, and intellectual property.
Examples of assets
Here are some additional examples of assets your business might hold:
- Inventory
- Office furniture
- Software licenses
- Customer contracts
- Investment securities
Key properties of assets
Understanding the critical properties of your assets is crucial for effective management.
These properties include liquidity, profitability, risk, and their role in business operations.
Evaluating these aspects helps you make informed financial decisions and optimize asset use.
For more insight, read A comprehensive guide to assets and asset management.
