We work with small business owners and entrepreneurs. Some are seasoned, others are just growing their side hustle. Their skills are varied and they have a wide variety of talents. We often get asked to explain the ins and outs of financial reports and have found that providing our favorite clients with a working knowledge of accounting terms is helpful. With that end in mind, we’re sharing that expert knowledge with you. So if you’re looking to get a better grasp on your small business books, want to understand your financial reports so you can make better business decisions, or even are just starting out and want to do it right… you can check out our word of the week and start expanding your working financial knowledge.
What are Business Assets?
When it comes to your business, assets can come in a few different forms. So let’s break it down. Assets, are either tangible (physical) or intangible (valuable, but cannot be touched) items that are considered property of a business or individual, have value, and are available to meet commitments and debts of said business or individual.
Our short list of business assets and what category they fall in (tangible vs. intangible) is as follows:
- copyrights or trademarks (intangible)
- vehicles or machinery (tangible)
- buildings, office furniture (tangible)
- goodwill or patents on processes or products (intangible)
- computers, printers, or inventory (tangible)
Breaking Assets Down By Type
Additionally, you can categorize assets as either current or long-term. Current assets or short-term assets included items that could be converted in to cash easily within a 12-month period. Your accounts receivable or the balances of your current business checking or savings accounts are a good example.
Long-term assets are items that aren’t intended to be turned into cash within that short 12-month period. Goodwill with your customers and vendors along with things like buildings, your machinery, and long term investments (more than 12 months to maturity) are things are considered long-term assets.
Once you have them categorized, assets have to be valued – and the value of an asset isn’t always what you paid for it. When putting a current value to your assets, you or your accountant will need to consider the following:
- fair market value – when the value of an item is agreed upon by a motivated buyer and the seller
- depreciation – the process applied by your accountant to spread the expense of your asset over time. (This is a big one for tax deductions, so you’ll want to make sure you hire an expert or that you’ve got it down by checking out the rules with the IRS if you’re going it alone on your books)
- accounting basics – calculating your assets can vary depending on your accounting method, type of business and so on. You’ll want to make sure that you’re staying consistent and that you’re using the right methods…
How to Put Your Understanding of Business Assets to Work
You may be thinking this is all fine and good, but what does knowing all about your business assets really do for you? Well, that’s a good question that definitely deserves an answer.
Knowing your business assets can help you run your business in a variety of ways. Often you’ll hear those finance guys talking about working capital, which is just a fancy term for the money you need to cover your day-to-day business operations. Knowing what it costs to run your business means you’re armed with the info to make sound business decisions – and your short-term assets and current liabilities is what you use to compute that working capital number.
As a business owner, you’ll want to grow your business and might need to take out a loan to do so. The bank or investor might ask you to put up collateral – your tangible and intangible assets can be used for that collateral and help you secure the loan.
And finally, when you’re putting your heart and soul into something you want to make sure that you’re mitigating risk. One way to do that is to have insurance. You’re sinking your hard earned cash into equipment, an office space or building and so on. Having a list of both tangible and intangible assets and their current value can help you determine what to insure, and that you’ve insured it with the right amount of coverage.