What You Own Vs Who You Owe - A Small Business Owner's Guide to Assets, Liabilities, and Understanding Their Net Worth

Just like the best poker player carefully considers their hand before making a move, as a business owner, you must understand the cards you've been dealt with. Knowing the true value of your business is like knowing your hand in a game of poker… It is the foundation upon which strategic decisions are made. Without this insight, navigating the complexities of business becomes a game of chance rather than skill. To steer your business in the right direction and make informed decisions, understanding its worth is crucial.

Knowing how much your business is worth comes down to your net asset position. Simply put, it's all about distinguishing the difference between what you own and what you owe. What you own are your assets, that is the things your business has. What you owe are your liabilities, that is things your business owes to others.

Your number one priority is ‘to have more assets than liabilities’.

What is an Asset?

An asset is something of value that your business owns and can use to generate future economic benefits. It could be cash, inventory, equipment, or even intellectual property. Essentially, assets are resources that contribute to the financial health and potential growth of your business. Assets can be tangible or intangible as well as it could be classified as fixed or current.

Tangible vs Intangible Assets

Tangible Assets are physical assets that you can touch and feel, like buildings, machinery, or vehicles. Tangible assets have a physical presence and are typically used in the day-to-day operations of the business.

Intangible Assets, in contrast, lack a physical form but still hold value for the business. Examples include patents, trademarks, copyrights, and digital property. Intangible assets often represent intellectual property or the reputation of the business.

Fixed Assets vs. Current Assets

Fixed Assets are long-term assets that provide lasting value to the business and are not intended for immediate sale. They include items like buildings, land, machinery, and vehicles. These assets are expected to be used over a long period to support operations and generate revenue.

Current Assets, on the other hand, are assets that are expected to be converted into cash or used up within one year. This category includes cash, accounts receivable, inventory, and short-term investments. Current assets are vital for covering day-to-day expenses and keeping the business running smoothly.

 What is a Liability?

In business, a liability is something that your business owes to others. It represents obligations or debts that your business needs to fulfill in the future. Liabilities are commitments your business has made to others, which require some form of payment or action at a later date. These obligations could arise from various sources, such as loans, purchases on credit, or contractual agreements.

For example, if your business borrows money from a bank or an investor for start-up or to finance expansion, the borrowed amount becomes a liability because your business is obligated to repay the loan, over a specified period. Similarly, if your business purchases inventory on credit from a supplier, it incurs a liability to pay for those goods within a timeframe in the future.

Liabilities can also refer to amounts set aside to cover potential future expenses, such as warranties, legal claims, or other operational costs being incurred within your business’ reporting period.

 Type of Liabilities

Generally, there are two types of liabilities long-term liabilities and current or short-term liabilities.

Long-term Liabilities are debts or obligations that are due beyond the next twelve months. Examples include long-term loans, mortgages, or bonds. Long-term liabilities are typically more significant and require repayment over an extended period.

Current Liabilities are debts or obligations that are due within the next twelve months. Examples include accounts payable (money owed to suppliers), short-term loans, credit card payments, or expenses accrued for services or other costs your business incurred and has not yet paid for.

As a small business owner, understanding what your business owns versus who it owes is the first step towards unlocking doors of opportunity and building a legacy of prosperity.

Regularly evaluating and managing assets to ensure they continue to contribute to the business's growth and success is crucial. Similarly, effective management of liabilities is vital for avoiding financial strain and maintaining your business's financial health.

To re-emphasize: "Your number one priority is to have more assets than liabilities." This principle underscores the importance of realizing that business success isn't solely about profitability; it's about safeguarding against insolvency and ensuring the long-term viability of your business.

Insolvency occurs when a business's liabilities exceed its assets, signaling financial distress and an inability to meet financial obligations. By prioritizing the accumulation of assets and minimizing liabilities, you're not only protecting your business from the risk of insolvency but also ensuring its financial stability and resilience in the face of unforeseen challenges.

The views reflected in this newsletter are those of the author and do not necessarily reflect those of Aegis Business Solutions, its partners, or any affiliated companies.

Found value in this article? Share it with your friends! In my next issue, we’ll discuss capital and share information that should help you decide on whether to borrow or exchange a stake in your business for cash. Have a topic you want me to share info on? Feel free to message me.

 Until next time.

Cheers to your ongoing success 😊