Richard Branson once said “business opportunities are like buses, there's always another one coming,” and with opportunity, comes growth. As your small business grows, your assets will increase. But what are assets, how do you differentiate between the financial and non-financial types and why is it important to effectively keep track of them? Read on to find out more.
What are assets and what is asset management?
A business asset is an item or resource of value that’s owned by your company. Assets can range from cash, stock and equipment to real estate and intellectual property. Every business will have unique assets, and it’s crucial to develop, operate, maintain, and sell them in a financially viable way. This is called asset management.
Within asset management, assets are categorised. They can be tangible or intangible, financial or non-financial. Tangible assets typically have a physical form. Intangible assets, on the other hand, don’t physically exist. However, they do have monetary value because they represent potential revenue for your business. Stock, furniture, machines and buildings are all examples of tangible assets, while intangible assets could include goodwill and a company’s brand name, along with patents, copyrights, trademarks and trade secrets, which are commonly referred to as intellectual property.
Financial assets vs. non-financial assets
So, now you know the definition of tangible and intangible assets, you can apply this to understand financial and non-financial assets. A financial asset is a liquid asset whose value comes from a contractual claim, whereas a non-financial asset’s value is determined by its physical net worth. Non-financial assets cannot be traded, yet financial assets frequently are. The former, over time, will depreciate in value, whereas the latter does not. Financial assets may, however, decrease in value through changes in interest rates and stock market prices.
Examples of financial assets:
Examples of non-financial assets:
Whether they are financial or non-financial, tangible or intangible, assets are typically divided into two groups: current assets and noncurrent assets. Current assets are assets that are expected to be converted into cash within a short amount of time, usually one year. Contrastingly, fixed or non-current assets are a company’s long-term investments, for which the benefits will not be fully recognised within the year.
The pricing and sale of non-financial assets
While financial assets such as bonds and stocks can be traded through an established active market, there is no active market for buyers and sellers of non-financial assets – and by the same token, there aren’t any market standards either. Instead, the seller will need to seek out a potential buyer, negotiate a sale price, make a sale and then go on to distribute the physical asset. The time it takes to do so makes non-financial assets illiquid, as opposed to liquid, which refers to the ease and speed with which an asset can be converted into cash.
Why are non-financial assets important in business?
Non-financial assets will be taken into consideration to evaluate and determine the value of your business. Assets, liabilities, and shareholders’ equity are all recorded on a balance sheet, which, together with the income statement and statement of cash flows, forms the foundation of an organisation's financial statements.
If you ever decide to take out a loan, you may be required to provide the financial institution with proof of your non-financial assets, which can be used as collateral to back secured debt. In the event that you default on your payments, the pledged collateral is sold to settle the overdue amount.
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