What is an asset?
Today I’m going to be talking about assets and their place in the financial planning landscape. Broadly speaking an asset is something that has lasting value and that can be sold. We’ll get into the specifics of different asset types later. First, let’s take a look at how assets work financially.
Assets on the cash flow statement
It’s often said that cash is king. New and existing businesses look to their cash flow to understand potential dangers to the business and evaluate how much ready cash they have to carry out new projects. However relying on cash flow entirely doesn’t give you the full picture of your business. This is particularly true when it comes to assets, which only make an appearance on the cash flow when they are bought or sold. In most cases, assets are bought by companies and then used until they are either no longer fit for purpose and are then either written off or sold on for a small fee.
Assets on the profit and loss statement
On the Profit & Loss Statement, asset purchase and disposal are recorded, along with any depreciation or appreciation of the asset. The P&L tracks changes in the financial position of the company, which takes into account more than just changes in the flow of cash in and out of the business. The P&L displays changes in value through tracking the business’ profits and losses.
We often think of profits and losses as purely to do with sales and expenses paid by the business – cash movements in short. But businesses can make profits and losses from changes in the value of their assets as well. Two examples from everyday life are cars and investments. A car gradually loses value by depreciating. The amount of value lost would be recorded as a loss on the P&L. Eventually the car might not be worth anything at all! Whereas an investment may sometimes lose value, but will generally increase in value. Any decrease in value would be recorded as a loss on the P&L, while increases in value would be recorded as profit.
Assets on the balance sheet
Assets are a major element on the balance sheet – the third and final of the major financial reports. The balance sheet completes the picture hinted at by the P&L, not just displaying the profit or loss arising from the business’ assets, but their value at any given time.
The purpose of a balance sheet is to lay out the things that make up the value of the business. These are split into three categories – assets, liabilities and equity. These must ‘balance’ in order for everything in the business to be accounted for. As equation at the root of the balance sheet puts it…
Assets = Liabilities + Equity
So what role do assets play in balancing the business?
Assets are a measure of what the business owns. If a business buys assets its value increases. But they also provide security. Owning assets gives the business a means of paying off its debts if necessary, without impacting its shareholders and reducing their equity.
There are several subcategories of asset, some of which are treated in different ways to others.
Current and fixed assets
The current/fixed asset classification divides assets in terms of their liquidity – how available they are to be turned into cash. This classification is used on most balance sheets. But there are other classifications of assets as well.
Current Assets are assets that can be turned into ready cash in a short amount of time. They include…
Fixed (or ‘Non-current’) assets
Fixed assets, by contrast, are not readily convertible into cash. They can be sold, but may not be able to be sold quickly enough to cover business debts.
Plant & equipment
Fixtures and fittings
Tangible and intangible assets
Tangible and intangible assets are classified based on their physicality. An asset is tangible if it physically exists. Intangible assets are often not covered by other asset classifications – they include such things as goodwill, brand, copyrights, patents and trademarks. Intellectual property would be accounted for as an intangible asset – but valuing these kinds of assets can be tricky. Definitely seek advice if the value of these assets is going to be important to the business’ finances.
Operating and non-operating assets
Put simply, operating assets are required for the running of the business, while non-operating assets are owned by the business but not a part of its day-to-day operations. Cash machines and delivery vehicles would be operating assets, while investments are non-operating assets in most businesses.
Planning assets in Brixx
In Brixx you can rename, and thus reclassify assets as you wish. The Brixx asset, investment and inventory components give you the tools you need to build a coherent pictures of a business’ assets, populating the plan’s dashboard, cash flow, P&L and balance sheet.