When you’re a freelancer or small business owner, it’s important to have an understanding of what business assets are and how to calculate them.
In this guide, you will learn:
- What are assets, and why are they important?
- What are the different types of business assets?
- How are assets, liabilities and net worth connected?
- How do I calculate my business assets?
What are assets?
An asset is something of value that you own or lease that helps you run your business, including cash or something you can sell or convert into cash. Business assets include but are not limited to equipment (like a laptop), bank balances, and stock.
Why are assets important?
Keeping track of your assets is a legal requirement for limited company owners (find out more here) and key to running a business, so make sure you take inventory of them.
You also need to know what assets you have and what they’re worth so you can insure them to protect yourself and your business. Lenders may also look into your business assets when deciding whether to approve a loan application and may even use them as collateral.
Assets are also key to determining your company’s net worth; the value of your business after you pay your liabilities. A liability is an amount you owe to a supplier, bank, or lender that you settle by selling or handing over an economic benefit like cash, company assets, or fulfilling a service. Tracking your net worth over time is helpful in determining your company’s financial stability.
Types of business assets
Assets fall into different categories: Current assets, fixed assets, tangible assets and intangible assets.
Current assets are either cash you have available now or assets that you can convert into cash within one tax year or operating cycle. You generally use them to run your day-to-day operations. For example:
- Inventory (goods or raw materials)
- Accounts receivable (money customers owe you)
- Cash equivalents like short-term bonds
- Short-term investments
Fixed assets are items that provide value to your business that have a shelf life of more than one year.
Examples of fixed assets include:
- Vehicles (such as company cars)
- Office furniture and equipment
- Buildings and land
- Long-term investments
These can’t be converted readily to cash to pay off short-term operational investments or expenses.
Tangible assets are fixed (physical) operational resources and are often essential for small businesses. Examples of tangible assets include inventory, property and equipment.
Intangible assets are nonphysical resources such as your brand name, storage facilities, patents, established processes, and copyrights.
Operating vs non-operating assets
Assets that are classified by their usage typically fall within the operating or non-operating categories.
Operating assets are those you include in the daily business operation, including cash, your company vehicle, and tools.
Non-operating assets aren’t required to run your business but may still bring value, such as short-term investments, vacant property or land, and interest income.
How do I calculate my business assets?
Below we’ve put together a step-by-step guide to help you identify and calculate your company’s assets.
1) Make a list of your total assets
First, you need to know what assets your company has. Start by listing the value of your current assets, including cash, money owed to you, and your inventory. Then list the value of your fixed assets (property, machinery, long-term investments).
Once you’ve added the value of your current and fixed assets, move on to calculating the value of your intangible assets that add value to your business’ reputation.
2) Add assets to a balance sheet
A balance sheet is an important financial statement businesses need to fill in to show the company’s assets, liabilities, and net worth. This information gives you and potential investors an idea of how your business is doing financially.
It’s generally simpler and more accurate to use accounting software for creating a balance sheet, but you can also use a spreadsheet or downloadable template.
Take your list of assets and add it to the balance sheet, grouping them into categories such as current assets, fixed assets and other assets.
Note that a balance sheet is a snapshot of a specific time period (quarter, month, financial year), but you still want to include the value of all your assets, even long-term assets.
3) Add up your assets
The easiest way to calculate your total assets is to add up the total amount for each asset category first. Then, take those amounts and add them together. For example:
Say you’re a painter and you have £3,000 in cash in your business bank account. You also have an ongoing job worth £6,000 that you haven’t billed £4,000 for yet (you’ve only billed £2,000 so far). Additionally, you have another job lined up worth £2,000. Finally, you have equipment worth £1,000 and investments worth £2,000.
Simply add these amounts together, as shown below:
£3000 + £4000 + £2000 + £1000 + £2000 = £12,000
This means you have £12,000 in total assets. Knowing how much money you have at your disposal helps you plan your finances so you can keep your business going.
There is also an accounting formula that’s often used to check a business’ financial health, which you can use to check if your total assets figure is correct. The formula is:
Total liabilities + Equity (net worth) = Total Assets
If you get the same number for your total assets using this formula as when adding them up manually, it means your number is correct.
How Countingup helps you manage your business assets
When signing up for a Countingup business current account, you also get free built-in accounting software that helps you manage your business finances easily. You’ll get access to real-time updates on your transaction data and cash flow – insights to help you keep your business running like clockwork. Find out more here.