Your small business’s assets are a key indicator of its value to both you and investors. Not sure where your small business stands? Break out your balance sheet.
Here, you’ll be able to compare your assets to your liabilities to assess your small business’s value. The more value you have, the more attractive you may be to investors. This can help you avoid being a part of the 87% of businesses that have to rely on their owner’s personal credit score to obtain financing.
We’ve all heard of assets—whether they’re a part of our personal finances or our businesses. Assets help communicate how much your business is worth and are made up of items your business owns, as shown on your balance sheet. These can be anything from cash to patents. Items you own can be considered tangible assets, such as land and equipment. They also can be intangible assets, such as trademarks or copyrights.
When looking over the assets on your balance sheet, it’s important to keep in mind that they are shown at cost—not market value. Cost represents the asset’s original purchase cost. Market value represents the price that the asset could be sold at in a competitive market. In some instances, businesses in the financial services industry may be required to show their assets at market value.
Your assets also will be grouped by category. For instance, you will see both current and noncurrent assets on your balance sheet. Your current assets are also known as short-term assets and your noncurrent assets are also known as long-term assets. At the end of your balance sheet, your assets are totaled.
Small businesses, like yours, use assets to generate more sales and increase their bottom line—also known as net income. You can use your assets to grow by reinvesting them back into your business.
For instance, you can use cash assets to pay for an addition on your gift shop’s building. Expanding your store allows you to carry more inventory. This provides more selection to customers and will likely help increase your sales.
As a business owner, your current assets probably pop into your mind first when you consider your balance sheet. This is because they can be converted into cash within one year’s time. These assets are also known as short-term assets and include:
- Cash. This includes money such as bills or coins that your small business receives.
- Cash equivalents. These include any investments you make that you can convert into cash quickly.
- Accounts receivable. These include money your customers owe you for products and services you’ve provided.
- Inventory. This includes any products you’ve purchased for your small business but haven’t sold yet.
- Various prepaid expenses. These are expenses that are due in the future and paid in advance.
- Marketable securities. These are investments that can be sold or traded, such as stocks or bonds.
Current assets are important because they help pay for day-to-day business activities. For instance, you can use your cash to pay utilities on your store’s building. Cash also can be used to buy more inventory or stock for your business.
As a small business owner, you’re probably not a novice at making long-term investments. These investments are represented as noncurrent assets on your balance sheet. Your noncurrent assets also are known as long-term assets, and are not expected to be turned into cash within one year of the date on your balance sheet. Noncurrent assets serve as long-term resources for your business. They include assets that you don’t intend to sell within a year, such as:
- Factories you own
When evaluating your noncurrent assets, you’ll also want to look at your identifiable intangible assets. These intangible assets do not have a physical form, but they still hold value for your business. Valuing intangible assets is difficult to do and usually requires outside experts.
Your intangible assets will only appear on your balance sheet if they’re acquired by your small business. They’re only recorded when they have a clear value and useful lifespan. Including your intangible assets on your balance sheet can help you avoid mismanaging them. It also can help you stay aware of their worth. This is important because intangible assets have a strong influence on your business and its value. In fact, they’ve even been found to affect a business’s value in the stock market.
Keep in mind that intangible assets that are developed or acquired internally are not listed on your balance sheet. These types of intangible assets do not have a market value directly associated with them. For instance, your small business’s logos, slogans, and other marketing materials hold value but will not be listed on the balance sheet.
Identifiable intangible assets include:
After you’ve looked at these, you’ll want to turn your attention to unidentifiable intangible assets. These assets cannot be separated from your small business. Unidentifiable intangible assets are not generally included on your balance sheet. However, you’ll still want to know what they are as you check out your assets. Examples of these include:
Financial assets are typically noncurrent assets such as:
- Investments in the assets or securities of other institutions
- Sovereign and corporate bonds
- Preferred equity
- Hybrid securities
- Real estate
However, they can be current assets as well. For instance, cash is a current financial asset. Typically, current financial assets arise from contractual agreements.
How to Analyze Assets
Reviewing your assets isn’t going to be enough to fully understand what they mean for your business. To draw deeper insight, you’ll want to analyze your assets. To investigate your assets, consider using these ratios:
Return on Total Assets Ratio
The return on total assets ratio measures how effectively you use your assets to generate net income or earnings. It measures this before you pay any financial obligations, such as taxes. The formula for this ratio is:
Return on Total Assets = Earnings before interest and taxes (EBIT) / Average Total Assets
To get your EBIT, which stands for earnings before income and taxes, you add together your company’s net income, interest expense, and taxes.
For average total assets, you can add up the assets for your current year listed on your balance sheet. You can then add this total to the previous year’s total and then divide by two to get the average.
Say your small business had $200,000 in assets last year and $250,000 this year. Your current EBIT is $4,000. In this scenario you’d fill out the equation like this:
0.0356 = $8,000 / ($200,000 + $250,000) / 2
This means that you have a 3.6% return on total assets. To determine if this is a good number, you may want to do some comparing or benchmarking. Some investors like to benchmark this percentage against a 30 day treasury. You also can benchmark against an estimated ROI that you would earn by investing your assets somewhere else. After you look at how your percentage compares, you’ll be able to determine if it is good for your small business or not.
Generally, higher percentages indicate that you’re converting assets into profits more efficiently. For instance, a result of 0.010% would be considered low. This means the small business would want to reassess their operation and make changes to increase their return on total assets.
Once you’ve calculated your return on total assets ratio, your work isn’t done just yet. Your next calculation will involve liquidity ratios. These ratios show if your small business is able to meet your current financial debt obligations. To understand this further, consider these liquidity ratios:
The current ratio measures your small business’s ability to pay off its short-term financial obligations. To calculate your current ratio, use this formula:
Current Ratio = Current Assets / Current Liabilities
Both your current assets and current liabilities are listed on your balance sheet.
Say your small business has $10,000 in current assets. You also have $5,000 in liabilities. You’d fill out the ratio like this:
$10,000 / $5,000 = 2
Current ratios that are less than one are considered on the low side. You want your current ratio to be above one. This is because the higher the ratio, the better your business is able to pay off your short-term financial obligations. Lower ratios mean you may have some trouble paying off your financial obligations. In the example above, the ratio is two. In this scenario, you’d likely be able to pay off your debt obligations. In many cases, retail businesses have high current ratios. This includes businesses such as:
- Clothing stores
- Gas stations
- Food stores
Your quick ratio measures your small business’s ability to meet its short-term financial obligations with its liquid assets. To calculate your current ratio, use this formula:
Quick Ratio = Liquid Assets (Cash and Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities
Say your business has $50,000 after adding up all your liquid assets. Your business also has $30,000 in current liabilities. In this case, you would fill out the equation like this:
$50,000 / $30,000 = 1.67
This ratio means that your business has $1.67 of liquid assets to cover every $1.00 of current liabilities. Ratios over one usually indicate that you can pay off current liabilities easily. Ratios under one indicate that you may not be able to fully pay them off.
Other Key Considerations for Assets
As you work to establish how much your business is worth, remember that assets represent only what you own. They don’t represent your business’s full value.
It’s also important to know that sometimes asset values need to be revalued at fair market value. To do this, you may need to turn to an expert. Valuation firms, consultants, or brokers who specialize in valuing small businesses are all good options to consider.
So, if the assets on your balance sheet don’t represent your business’s full value, what else is included? Your business also draws value from:
- How much cash flow your business produces
- You total or gross sales
- Earnings of shareholders who own your stock
- Your existing customer base
As you evaluate your balance sheet for assets, you should know that there are some assets not included. Some assets that are not on your balance sheet are:
- Your small business’s location
- The value of your employees
- Research and development you’re involved in
- Unidentifiable intangible assets such as goodwill, branding, and reputation
Now that you understand how to analyze the assets on your balance sheet, don’t waste another minute. The sooner you conduct your analysis, the sooner you can strategize ways to continue building your enterprise and attract investors.