Imagine for a minute that your business is reaching its maximum production capacity. Profits are higher than ever and you can’t satisfy the demand of your product. Another example. You want to travel all around the world. Therefore you decide to learn a new language. Or maybe you develop a new computer software that can process data as twice as fast. Last but not least, your hobby might be writing novels or composing music.

Let’s stop here and take a look at all those things. They all are different, but they have something in common. They can become assets.

Assets is one of my favourite words in business, because of their many shapes. But what exactly is an asset? You may find several definitions among textbooks, but to make it simple, an asset is something that can increase the capacity to generate earnings over time (or reduce costs). In a business, it increases the capacity to generate higher profits and in consequence, cash inflows in future economic periods. This last definition is closer to what you might find in an accounting book.

However, I often hear several misconceptions that need to be clarified. The most common is to think that an asset is simply a machine, a building, anything material that can be used to produce tangible goods, or as accounting books call them, property, plant and equipment. When you look at your balance sheet, you’ll probably see the value of your assets, composed probably by computers, buildings, furniture or even software. But these aren’t all of your assets. What you see in your balance sheet is what you have to disclose in your financial statements in accordance with accounting regulations for external parties that might be interested such as the government to calculate your taxes, find investors or the public in general.

In any case, it’s crucial to understand what your assets are. A good start could be to read this article about good and bad expenses, where I talk about good expenses, since these can become an asset.

„Oh, I’ll buy a house and a car immediately to acquire more assets”

Hold your horses and ask yourself the question. Are they really assets? The answer could be both yes or no. Actually, it depends. If you buy a house to rent it and sell it in the future for a higher value, then yes, it can be considered and asset. A car wouldn’t be an asset, despite the comfort of traveling in your own vehicle, since owning it usually implies maintenance costs, taxes, fuel, insurance, and other expenses. If you don’t use it, you’ll only save the fuel and maintenace, but the technical inspections and taxes are always present. In addition, it loses value over time.

On the other hand, a car could be an asset in the case, for example, that you use it to travel to work and you don’t have any other options. In this case, its purchase can be justified, since without it, you wouldn’t be able to work. From the business perspective, the purpose could be to visit clients to build commercial relations or simply, make a sale.

Here below you can find some examples of assets beyond machines and computers, that can contribute to the expansion of a business:

• Human capital: hiring employees with key skills can contribute to generate earnings. Your skills as a manager count as well.
• Training and education: applied to human capital, allowing employees to develop their skills. A course in time management, for example can help increase productivity and efficiency. Foreign languages can allow you to expand your market or build stronger commercial relations with foreign business partners.
• Investments: stocks, bonds, lending money, among many other examples that can become a source of passive income, in this case, in the form of dividends or interests.
• Intellectual property: books, music, designs, patents, rights of use, among other examples, are powerful assets if managed properly, since they can become a secondary source of income. For example, in the case of successful books or music, authors keep obtaining royalties for their sales even years later of releasing it to the market.

What do you think about assets? If you need business advice or consultancy, feel free to drop me a message in the contact form.