What are assets? The essentials of asset management
It’s worth your while getting to grips with business assets, and not just so you know where to list them in the right columns the next time you fill in your balance sheet.
Thankfully, we’re not talking about number-crunching for the sake of it; we’re more concerned with things that count in working life. For example, what the most efficient ways of kitting out your office with a new iMac are, or making sure the bank manager can see the value of your hard-won client list when he considers you for a business loan.
What does a small business need to know?
For a newbie entrepreneur, that rather intimidating term ‘asset management’ is principally about thinking smart when it comes to everything that’s valuable about your business. Getting the essentials right can help you showcase your business in the best possible light to the people who matter (e.g. investors and big clients). It can mean a lower tax bill, and it can also help you identify ways to run your business more efficiently.
However, firstly, some jargon-busting is in order. Unless you regularly dine with accountants, knowledge of asset classification is unlikely to make it onto your list of after-dinner conversation topics. Yet, there is a point to it all because later on in this series, we’ll consider the best ways of acquiring and getting the most out of your business assets. Here though, our aim is to unpick some of the terms you’ll come across and to get you thinking about what might – and might not – be considered an asset within your business.
How to spot an asset
In the broadest sense, assets are all of those resources that your business either owns or leases in order to operate. From a business account’s point of view (which is what we’re mostly concerned with), assets are those resources of value which you own, and that are capable of being turned into revenue – these tend to be items that will be used by your business over a number of years.
Many items (e.g. machinery, office equipment, company vans) are easy to identify as an asset. However, there’s no universal lower value limit – which means there’s often a grey area. For instance, a big business is more likely to consider a £250 printer an expense, whereas a small business would probably list it as an asset. As another example, for a designer, an individual portfolio of the type presented to clients would generally be classed under ‘cost of sales’ or ‘materials’. However, if you’ve invested in a lot of these items at once, then this could be an asset.
All businesses are faced with these ‘grey areas’ – which is why it’s good practice to have a rule in place to decide the minimum value of an asset for your business. This is called a capitalisation policy.
There are no standard rules here, your definition may change gradually as your business grows, and your accountants may have their own guidelines in place, too. Typically though, a useful definition of a capital asset for a small business could be an item costing over £100, with an expected working lifespan of over 3 years.
It makes sense to look at asset classes as they appear on a typical balance sheet. Under the ‘Assets’ section, the first heading is usually ‘Fixed Assets’. These are your long-term purchases and possessions that will be used by your business for a few years. Where relevant, these can be subdivided as follows:
Tangible fixed assets
These are physical items and typically include the following:
Land and buildings owned either freehold or long-term leasehold
Plant and machinery
Furniture and fittings
Intangible fixed assets
These are non-physical items and may include the following:
The element of value attributed to your business that’s more than just the physical assets. It refers to factors such as brand recognition, reputation, and the quality of your customer relationships. Putting a value to it can be especially important when demonstrating the future profitability of your business to investors or buyers. You cannot just pluck a figure from the air though: your accountant should guide you on when to start including it as an asset, and how to value it.
If you’re developing new apps, designs, and/or processes, you should think about protecting these through patents or trademarks. Next comes the need to value these as intangible assets. Once again, you’ll need specialist help with this.
Website domain names
This becomes especially relevant when your online business grows and the website itself becomes something of value in its own right.
These are short-term assets, where value can fluctuate from day to day. When it’s time to do your balance sheet, with your current assets list you are essentially providing a snapshot of your business at that moment in time. These assets include the following:
Often called inventory, stocks relate to anything that a business is not using, at that time, for specific functions within the business. Stocks can be incredibly important, as they could pertain to the very product your business could be producing – if they ran out, your business may cease to produce said product. Therefore, good record keeping can save a lot of hassle here when it comes to not only valuing your inventory, but also the running of your business.
Work in progress
This can relate to work that has been completed, but has not yet been billed to customers. The importance of timekeeping here is especially important, as the time it takes you to finish a particular piece of work can result how much you get paid for. For example, if you charge an hourly rate for your services, you need to log the time you put in accurately.
Have some of those customer bills been lingering for too long? You need a process in place for chasing accounts and writing off bills you have no hope of recovering. Accounts receivable is a process that represents a legal responsibility for the customer to pay what they owe – therefore, it listed on the balance sheet as an asset. These often come in the form of lines of credit.
Cash in hand, or at the bank
Cash in hand represents money that can be spent immediately by a business: this can range from buying small items (petty cash) to what the business can undertake as a new project, for example. It is money that is readily available to the business. Cash in the bank, on the balance sheet, is combined with cash in hand for accounting purposes, and represents the liquid form of a current asset: if you sold an tangible asset, such as a piece of machinery, and you deposited the money from that sale into a bank account, that money now represents a current asset.
With this snapshot in mind, it’s worth taking stock of your business as a whole. Does your business have assets you didn’t even think about until now (goodwill, for instance)? At the same time, have you thought about your personal assets and how they could be put to work in your business? Check out our help centre for a range of guides on how to make best use of your resources.