Understanding assets and liabilities is the key to gaining insight into any business’s financial health. Broadly speaking, assets and liabilities describe the monetary value of things that a business owns (assets) and things that a business owes (liabilities).
Within those general categories there are details and more precise definitions that need to be understood. We’ll take a closer look at those details, before moving on to the applications of this knowledge. It is important to understand business assets and liabilities, but the real benefits come from knowing how you can use that knowledge.
What are assets?
Business assets include everything with a monetary value that a business owns or expects to receive. This could include anything from current stock to money owed to the company (accounts receivables).
Within the category of assets there are two important distinctions to be made. The first is between tangible and intangible assets. Tangible assets are any physical items the company owns with a cash value, including property, machinery and money in the bank.
Intangible assets are everything else: those items with value that are not physically held somewhere. Accounts receivables fall into this category, as do things falling into the bracket of intellectual property.
The other crucial distinction is between current and fixed assets. The importance of this distinction will become clearer as we go on, but it essentially creates a line between those assets that can be converted into cash in under 12 months (current) and those that can’t (fixed). Fixed assets (such as properties) tend to have a long lifespan, and normally depreciate in value over time.
What are liabilities?
Liabilities are everything that a company owes that has a value. In general, liabilities are various kinds of debts. Those that have to paid off in under 12 months are called current liabilities, whereas long-term liabilities are those that a business has longer to pay (like a mortgage).
What is equity?
The difference between all of a company’s assets and liabilities is the equity. When you deduct the total value of any liabilities from the total value of a business’s assets, you’re left with the value of the assets that the owner(s) of a company own outright. Of course, if you deduct the liabilities from the assets and you’re left with a nothing at all, or even a negative value, then there won’t be any equity, and there’s a reasonable chance that the company is in trouble.
Equity can seem less straightforward when multiple owners and/or shareholders are involved, as this will mean that various percentages of the equity’s value are owned by different people, but the principle of calculating equity remains the same, and the business’s overall health will be indicated more by the sum of the assets and liabilities than by how any equity left over should be divided.
Understanding your own financial health
As you will have begun to pick up throughout this introduction to assets and liabilities, those two figures are key indications of your business’s health. The most immediate signal that something is wrong is where current liabilities outweigh current assets. If this remains the case, then within 12 months your business is going to find itself in a position where it cannot meet its financial obligations, which could lead to a lot of trouble in the future.
Staying on top of your accounts and keeping a careful track of income and outgoings is an important aspect in helping to keep your business in the green. If you leave everything to the end of the financial year, you may find that things aren’t looking as rosy as you’d thought.
Accounts of other businesses
The same principles apply to the accounts of other businesses. It’s important to keep an eye on your competitors’ assets and liabilities because you’ll need to know who’s doing well, who’s set to grow, and who’s at risk of insolvency. This allows you to prioritise which businesses you need to be aware of, as opposed to trying to better the company that you think is your rival, but is actually failing.
With any level of Company Check membership you can have access to the credit reports and Companies House documents of your competitors, giving you all the information you need to keep track of their assets and liabilities. With this knowledge, alongside an understanding of your own business’s financials, you’ll be able to help your company to make the best decisions in the coming years.