Business Basics: Assets 2 Level

Business Basics: Assets

How can you find out how much your company is worth? The answer sounds easy: simply add up the value of all your assets and take away all your liabilities.

Of course, real life is never that simple, and many assets are extremely hard to value. For example, intangible assets, such as patents, copyright, trademarks, trade names, franchises, and goodwill, are much harder to value than tangible assets. Intangible assets explain why companies like Apple, Coca-Cola, and Toyota are worth so much money: their inventions, creations, and reputations are far more important than the actual value of their factories and machines.

Financial assets, such as stocks and bonds owned by the company, as well as accounts receivable, are usually grouped together with tangible assets. Even though they don’t really have a physical form, they are much easier to value than intangible assets.

Another important distinction is between fixed assets and current assets. Fixed assets are things such as land, buildings, machines, and equipment, which the company has bought in order to use over a long period of time. Most fixed assets lose value over a period of time – a process called depreciation. Depreciation explains why your ten-year-old computer is worth a lot less now than when it was new!

Current assets, in contrast, include cash and everything that the company expects to turn into cash soon, such as short-term investments and accounts receivable. A company’s inventory, which includes raw materials, work in progress, and finished goods, also forms part of its current assets.

In general, current assets are more liquid than fixed assets. In other words, they can be turned into cash more quickly without losing value. Liquid assets are important because they allow a company to pay its bills on a day-to-day basis. If your company’s money is all tied up in fixed assets, long-term investments, and intangible assets, but you have no cash in the bank today, you won’t be able to pay your employees or your suppliers tomorrow. If this situation continues for too long, your company’s assets may need to be liquidated – turned into cash – even though they will lose a lot of value in the process. For this reason, liquidation often means the end of a company’s life.