Business assets might include the presses and machines your company uses to make handbags, but equally, it might be the software used to deliver a service or the branding that captures your customer’s attention.
“Business assets are the things that you employ to generate an income, and without them, your business could not operate,” says Steven Englander, Founder and CEO of Accounts Direct.
Understanding business assets
Business assets are important because they increase the value of your business, making it easier to secure investment and generate revenue. “Your assets are what give the company value, and by using capital allowances, they can offset some of your tax liability,” says Englander. He adds that understanding the liquidity of assets is also "important in understanding and managing your cash flow”.
Having a good understanding of your company’s assets is also essential to informed decision-making, adds Englander. “Many SMEs take quite an [indifferent] approach to assets, but understanding what they are, and how they generate income means you can manage them effectively,” he says. “For example, is it better to lease equipment or buy it outright? Which assets should you prioritise when doing maintenance or looking to upgrade?”
Current assets vs. non-current assets
The first way that business assets can be classified is based on how easy the asset would be to convert into cash. Most business assets can be classified as current or non-current. These terms are often used interchangeably with ‘long-term’ versus ‘fixed’ assets.
A current asset is something your company could easily convert into cash within a period of one year. It would often include things like debt, cash and stock.
A non-current asset is something your company owns that drives long-term value and cannot easily be liquidated. It might include specialised equipment, a building that you lease, or a specific design that you have patented.
Tangible vs intangible assets
Second, assets can be classified as ‘tangible’ or ‘intangible’. As you’d expect, a tangible asset is something that you can see while an intangible asset is not a physical object.
Examples of tangible assets
- Stock
- Premises
- Vehicles
- Software and IT equipment
- Machinery
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Examples of intangible assets
- Licenses
- Royalties
- Recipes and formulations
- Branding
“The value of intangible assets is often greater than physical assets even though they can’t be seen,” notes Englander. “The value of your brand, or a unique recipe formulation is often that only you have it, and it can’t be easily replicated.”
ChicP makes sustainably sourced hummus for established food retailers. The business has relatively few tangible assets, says Hannah McCollum, the company’s founder. “As a small company, the volume of product we’re creating means it’s more cost-effective to outsource the manufacturing to a bigger company that offers greater economy of scale,” says McCollum. “We don’t own a factory, we don’t use any specialist equipment, and we don’t have company vehicles.”
Instead, the company’s real value lies in its intangible assets. McCollum says she recognises that the major value of her business lies in its formulation, branding and sustainable ethos. “We are unique in the market because we’re using food waste to make high-quality products, and we have invested a lot in assets like branding, formulations and how we go about recovering food that would otherwise go to waste,” she says.
Operating vs non-operating assets
Assets can be viewed as operating or non-operating assets, depending on how they are used.
Operating assets are things that are required for the operation of your business, and can include things like cash, accounts receivable, inventory, buildings, patents and goodwill. A non-operating asset is something that your company owns but does not need.
This might include assets like a building that is not used, or equipment that is no longer used by the company. These assets can be disposed of and sold, but some businesses might hold on to them for future operations.
Depreciation and amortisation
If you buy business assets, understanding depreciation and amortisation can help you make better long-term financial decisions.
Depreciation and amortisation are similar concepts that both capture the value of an asset over a period of time. If your company spends £100,000 on a new production line, that equipment is a cost to the business every year over its lifespan, which might be ten years. This cost becomes a tax deduction which can reduce the company’s overall tax liability and provide a better overall view of its financial position.
The difference between amortisation and depreciation is the type of asset that is being examined.
Amortisation is used to spread out the cost of intangible assets such as intellectual property and patents over their lifetime, while depreciation is used to calculate and write off the value of physical assets over their useful lifetime.
These are similar techniques, and both are used to expense assets over a long period of time and are used to allow businesses to pay less tax and interest, says Englander. “A common view is that you pay £1,000 for an asset, write it off over five years, and offset £200 each year against tax,” he says. “However, you should be putting that £200 away because when it’s time to replace the asset, you will have those funds.”
At ChicP, Hannah McCollum is keeping a close watch on her business assets and how they drive value for her business. “We are hoping to secure new investment in the next couple of months, so understanding and capturing the value of our business assets is vital to our mission,” she says.
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