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A guide to managing your business assets

ENTERPRISE
By Moses Omusolo | September 29th 2021
[Courtesy]

Running a small business is no walk in the park. From fatigue, lack of capital to rogue workers, the challenges for business owners seem endless and many have thrown in the towel.

But back to basics, experts believe that any entrepreneur worth their salt should understand the essentials of asset management.

For starters, the industry understands an asset to be a resource owned or controlled by an individual, corporation, or government with the expectation that it will generate a positive economic benefit.

“An asset is anything that one owns and can be used for the production of goods or services or to help improve one’s quality of life. Examples are cars, desks, buildings, and so on,” simply explains Certified Financial Analyst (CFA) Elizabeth Nkukuu.

The common types of assets globally include current, non-current, physical, intangible, operating, and non-operating.

Understanding the asset types 

As the Corporate Finance Institute (CFI) points out, correctly identifying and classifying the types of assets is critical to the survival of a company especially when it is trying to swim out of the troubled waters of either insolvency or bankruptcy.

Also critical to the well-being of a business is a working knowledge of essential and non-essential assets. These have further been classified as falling into either core or non-core assets respectively.

CFA Nkukuu has captures the meaning and place of core assets for small businesses aptly: “When it comes to a business, the core assets are those that you need for the day to day proper running of your company or organization. The core assets vary from industry to industry and company to company depending on the business model that one has adopted, for example, if you are in manufacturing the plant and equipment is a core asset while since you can outsource delivery the trucks might not.”

Current assets come down to cash and cash equivalents, short-term deposits, accounts receivables, inventory, marketable securities, as well as office supplies.

Fixed assets on the other hand can be taken as land, building, machinery, equipment, patents and trademarks. Such that when core assets are classified based on their physical existence, we get either tangible or intangible assets.

This in turn puts land, building, machinery, equipment, cash, office supplies into the tangible category while goodwill, patents, brand, copyrights, trademarks, trade secrets, licenses and permits, corporate intellectual property naturally fall into the intangible category of assets.

Where do non-core assets come in?

“The no-core assets are those assets which whether you own them directly or indirectly do not quite affect the performance of a company. For example, if you outsource your digital market you do not have to necessarily own the cameras and other equipment that are used in the production of the content.”

This understanding in turn should naturally compel the fledgling small business owner to seek to be properly grounded on the fundamentals of asset acquisition and their disposal.

The asset acquisition process

On the specifics of the asset acquisition process, Nkukuu observes: “When buying and equipment it is good to look at the overall cost and value of the asset to ensure that you get more value than you are buying, look at the available cash flow you have to spend, look at the cost of the source of capital to ensure it is less than the return you shall get from the asset, ensure you have skilled personnel to use it and look at the model to see if the leasing or renting would be cheaper.“

Investment analyst Mihr Thakar­­­­­­­ believes that asset acquisition properly begins by taking into account the purpose of an asset.

He says that it may not directly bring economic benefits but may be useful for other reasons, for example, a decorative fountain to attract customers.

An asset may also be used in generating economic benefits or reducing costs for example a weighbridge or machine for producing straws.  It can also be used for speculative returns and it may be used in the direct course of operations for example cash and inventory, among others. 

Thakar adds that when buying an asset, some factors must be considered. 

Key among them is what objectives the assets are purchased to meet. “To what extent will the economic returns generated from those assets meet the said objectives and at what cost, including opportunity cost of capital applied to the purchase?”

He urges entrepreneurs to carefully consider the risks of investing in or holding the asset, such as the potential of deterioration in value at a faster pace than the returns and the costs of preserving and deriving value from the asset for example security, operating cost of machinery, social media influencing costs to boost the sentiment around a stock purchased by an investment firm etc.”

Thakrar further notes that such a journey also entails navigating the environmental, legal and public relations dynamics.

“Businesses today need to be very careful about the changing regulatory landscape and the risk of assets being rendered fully or partly unproductive due to changes in legislation is a significant threat,” he warns.

“Moreover, the rapid-fire dissemination of information in the 21st century means that the potential of negative press can soon turn into a boycott and international fiasco. An example would be a leak that the coal mine purchased by an offshore subsidiary is polluting nearby groundwater.”

Asset disposal

Turning over to the dynamics of asset disposal, Thakar again lays out the proper procedure. He begins with what to do with idle current assets.

“Every asset has a useful life. Assets such as cash and inventory are simply consumed in the course of normal operations. However, they are not without risks of holding, for example, cash loses value over time (inflation), while inventory can spoil or become obsolete. Therefore, current assets must have fast turnover in order to ensure that they are used in achieving the organization’s objectives.”

Thakar’s also says that entrepreneurs should approach asset disposal carefully. 

“Non-current assets are depreciated over a course of time. At some point, it may become necessary to raise cash from idle assets or dispose of core machinery in order to bring in newer, more efficient technology. In the case of the latter, the disposal value should ideally be higher than the depreciated value of the asset. However, in some cases, it may have to be disposed of at a loss, but the economic benefits of the sale may be realized in the next period when a newer, higher productivity machine increases gross profit.”

Nkukuu adds that when selling an asset, business owners should aim for a better price compared to your current cost.

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