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Assets are anything that an individual or a corporation owns that has a value, both physical and intangible. A financial asset is an asset that’s generally non-physical, deriving its value from a contract or claim (known as a financial instrument). A financial instrument is a contract that results in a financial asset for one party – and a financial liability (or equity instrument) for another party.
Financial assets can be loans – but only from the point of view of the lender – because they are a liability that’s owed to the party offering the loan. When a lender has a contract or even an IOU, this contract can be converted to cash when the borrower repays the loan. However, to a borrower, the loan is not a financial asset but an equity instrument.
In this post, we’ll dig deeper into financial assets, explaining what they are and the most efficient way of overseeing them.
Definition of financial assets
Financial assets are considered ‘liquid’ assets (for example, bank deposits or stocks), that derive their value from contractual claims or the ownership of underlying assets. The underlying asset could be a commodity or real estate, for example. Real estate is often referred to as a financial asset but can also be considered a physical asset.
Financial assets are liquid, because they can be sold easily, but they can also lose value over time. An individual or company with high liquidity has enough assets to meet their financial obligations. A business’s financial assets are found in the form of accounts receivable and notes receivable. This information is included on a balance sheet.
Examples of financial assets
Common financial assets include stocks, bonds, cash balances, bank deposits and investment portfolios. The safest financial assets are cash, followed by bonds – specifically government bonds – because there’s little risk of default. However, these also have the lowest rate of return.
Financial asset management systems
As a company grows, the assets it accrues will grow too. It’s important to know the value of every financial asset to ensure it’s being used effectively. It’s also essential to review the value of all financial assets regularly to keep financial records up to date.
Financial asset management systems are software programs or internal systems that keep track of a business’s assets. The system should be able to:
Quickly identify whether a financial asset is lost or stolen, highlight mismatches and errors, and recommend corrective action.
Improve efficiencies by tracking assets throughout their life cycles.
Help companies stay compliant by increasing accuracy and keeping information in a central place, ready to be pulled for compiling reports and financial audits.
Minimise financial and reputational risk.
Reduce the risk of manual errors.
Financial asset allocation
Aside from cash, all financial assets carry risk, since there’s a risk of losing money on any investment. Stock prices can fall, bonds may default, banks can fail, all of which can lead to a loss of capital.
Financial asset allocation is an investment strategy that’s designed to balance risk and reward by allocating assets according to an individual’s or a business’s goals and risk tolerances.
There’s no magic formula for finding the right financial asset allocation. However, weighing up risk and reward should play an important role in decision making for investors. Financial asset management systems can help investors with asset allocation by automating the process, using rules-based, real-time, oversight tools.
Financial assets help companies and individuals (and governments) with the flow of money. They transfer capital from those with excess funds to those in need of funds. Financial assets can help individuals and companies ensure they have a secure future, as well as provide a cushion in case of a crisis or unexpected expense.
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