Guide to the Financial Health of your Business
A business asset is a tangible or intangible item that is purchased for business purposes and kept on the balance sheet in order of liquidity.
Assets are a key feature of a company’s balance sheet, which shows the company’s financial standing by comparing assets to liabilities. A basic equation of business is assets = liabilities + equity. On an old-school balance sheet, assets are listed on the left side of the ledger, and liabilities are on the right (plus equity or shares) and the ledger must balance as it displays the financial health of the business.
Current assets are those business assets that will be liquidated, or turned into cash, within the year, such as inventory and accounts receivable. Long-term assets are also known as capitalized assets, things that will be kept longer and are less liquid, including vehicles, buildings, and furniture.
Many people define business assets in terms of tangible or intangible: tangible assets are goods, property, and inventory whereas intangibles may include a customer list, software, and copyrights or patents. A further distinction is a current asset vs. fixed assets, which are similar categories to long term vs. short-term assets, determined by liquidity.
Assets are further designated by the way they’re treated for tax purposes. Long-term tangible assets like structures and vehicles are depreciated over time while intangible assets such as intellectual property are amortized over the period assumed to be its useful life. “Goodwill” is an intangible asset that results from buying another company in whole: it’s the cost of purchase minus the company’s assets.
Toxic assets are those that lose value and become difficult for a company to liquidate. This can happen when a company with a large inventory of aging assets is suddenly faced with a competitor who has updated assets and corners the market. Another example is when individuals stopped paying mortgages in 2008 and banks holding the mortgage notes were left with assets that had lost considerable value, or toxic assets.
Types Of Assets
Types of long-term or capitalized assets
- equipment used for creating products or doing business, including telephones, computers, office furniture;
- land, buildings, machinery
- patents and trademarks
Types of current assets
- marketable securities
- office supplies
- cash and cash equivalents
Another way to classify assets is operating versus non-operating, both of which generate revenue at some point. Operating assets are necessary for running the business, while non-operating assets are long-term possessions like securities, investments, and unused property. Operating assets include machinery, cash, and equipment.
Accuracy Is Key
Businesses must invest in professionals who have up-to-date knowledge of asset classifications because errors can be costly. Putting an asset in the wrong category can make a business appear to owe more money than it actually does, which may discourage investors and turn off loan officers when the company seeks more funding to expand. Likewise, undercounting assets such as inventory is a significant issue in balancing the ledger.
Off-Balance Sheet Assets
Another class of assets does not appear on the company’s balance sheet, including things like leases for equipment and other financing deals. In such a case, a company may opt to create or do business with a subsidiary to acquire necessary items yet keep them at arm’s length for accounting purposes.
Different types of business incorporation strategies may protect assets, both those of the company and those of the owner. In many cases, an individual (employee or visitor/customer) may be able to sue a business principal or partner for their personal assets or both company-owned and personal assets unless the assets are protected through a limited liability entity. Entities such as C corporations, S corporations, and LLCs may protect an individual principal’s personal assets if the corporation is held separately from the individual. These corporate entities protect the principals from breaches of contract, injuries, or debts while dictating how profits are handled. Personal service providers such as attorneys and doctors are not individually protected from liability by such incorporations. Experts suggest creating a trust to shelter personal assets in the latter situation. Partnership businesses do not offer the same protection from business liabilities – in this case, again, it’s best to protect personal assets through a trust.
Bankruptcy And Assets
If your company is in danger of bankruptcy, consider carefully the chapter filing that will protect assets. Chapter 7 bankruptcy requires complete liquidation of assets, while Chapter 11 allows a company to restructure and attempt to hold onto assets while repaying creditors but all major decisions must be approved by the bankruptcy trustee. Sole proprietorships use Chapter 13 if they meet a specific threshold, which protects assets.