To understand your business’s financial stance, it’s imperative to keep track of its assets. Knowing the different types and carefully keeping track of them can increase savings, reduce risk to your business and improve future planning. But differentiating between fixed and current assets—amid a flurry of other financial terms—can be confusing.
Below, we break down the main variances that small-business owners should keep in mind:
These are physical investments that serve the business over the long term. Although fixed assets are not easily converted into cash, they are needed to run the business and earn profits. For example, things like land, buildings, furniture, vehicles, computers or machinery are essential to operations, although they do not directly provide cash flow.
Because fixed assets are long-term investments, they tend to be high-value items that represent a substantial part of the business’s net worth. Therefore, accurately depicting them is an important part of communicating your business’s financial position to investors and partners—and on your tax forms. Dutifully maintaining assets like machinery reduces costly health and safety risks, and secures the longevity of the investment, so small-business owners should be inclined to guard them with the same solemn as cash.
These are resources that will be used or converted into cash within one year. This includes swiftly-liquidated investments like insurance claims, accounts receivable and stock, as well as short-term possessions like inventory and cash itself. These assets indicate how much money a business has available to fund operations and growth for one year without support from a private equity company or another third-party source.
Because current assets represent expendable money, understanding their value is critical to planning for the immediate future. Savings can be found by determining which assets are better to liquidate if necessary. If a business doesn’t have enough current assets available, it may have to look at debt financing, which does not always position a company well for growth.
Both fixed and current assets should have a presence on your business’s balance sheet, along with liabilities and equity. Being mindful of them will help you to evaluate the efficiency of your spending habits and plan future budgets for your business. When used in conjunction with best financial reporting practices, balance sheets containing fixed and current assets serve as indicator of a well-run business, which will be helpful should you choose to ready your business for a capital raise or sale.
Ready to turn your assets into business growth?
Contact Evolution Capital Partners at (216) 593-0402.