Businesses possess two primary types of assets:
- Tangible assets
- Intangible assets
Let’s delve into the first type of asset to help you grasp its significance to your business.
Understanding Tangible Assets
Before we define assets, we must first understand the term “tangible.”
What does tangible mean?
An item that is tangible is something you can physically touch. Assets are belongings owned by your business. Therefore, tangible assets are items that you can touch, right?
Examples of tangible assets include:
- Inventory
- Furniture
- Equipment
- Machinery
- Fixtures in a building
- A building
- Land
In contrast, intangible assets are things that you cannot touch, such as your customer list, trademark, or patents. Despite being intangible, these assets have value and are valued differently depending on your industry.
While a farm may have numerous intangible assets, it won’t attract investors without tangible assets like land.
Conversely, a software patent held by a company like Microsoft can be valued at hundreds of millions of dollars and is a significant factor for potential investors.
Significance of Tangible Assets in Financial Management
Tangible assets play a crucial role in financial management due to:
- Depreciation over time, leading to tax benefits or potential losses
- Being used as collateral for loans
- Driving the business’ sales or capability to offer products or services
You can use your building as collateral to secure a loan. If you default on payments, the lender can seize the building and sell it. Tangible assets make it easier to secure loans compared to relying solely on intangible assets.
Valuing tangible assets is also simpler than valuing intangible assets.
Price comparisons are more straightforward with tangible assets. For example, the brand value of Nike would be significantly lower without its tangible assets. On the other hand, the value of a warehouse can be determined based on comparable data for similar properties in the area.
Approaches for Evaluating Tangible Assets
Tangible assets vary in form, size, and worth. To accurately value your assets, specific methods must be employed.
Overview of Valuation Methods
Valuation methods for tangible assets typically fall into two categories:
- Book value
- Market value
These values can be likened to purchasing a used car. While the book value represents the amount you paid for the asset, the market value reflects the price buyers are willing to pay based on demand.
Book and market values can also apply to the sale of a business and the returns for shareholders. However, for this discussion, we will focus solely on asset valuation without considering the sale of the company.
Let’s explore the key distinctions between these valuation methods and their implications for your business.
Book Value vs. Market Value
Book and market values are typically associated with:
- Share value
- Share value during the business sale
For assets, the two values can be understood as follows:
- Book value: The book value of an asset is its purchase price minus any depreciation. For instance, if you bought equipment for $100,000 and it has depreciated by 40%, the book value would be $60,000.
- Market value: While the book value is based on the purchase price, the market value fluctuates based on market conditions and demand. For instance, a rare piece of equipment may have a book value of $100,000 but a market value of $150,000.
Book values are often included in balance sheets as they are easier to calculate. By researching the asset’s selling price and assessing depreciation, accountants can determine the net value of the business’ assets.
Consistency in valuation methods is crucial. Whether using book value or market value, maintaining a uniform approach ensures accurate asset valuation and prevents significant discrepancies.
Impact of Depreciation on Asset Value
Considering the definition of tangible assets, it’s evident that their value diminishes over time. A new piece of equipment purchased for $100,000 may depreciate in value due to wear and tear.
While depreciation reduces an asset’s value, it can also result in tax deductions in some countries. Additionally, assets may appreciate in value over time, offsetting depreciation.
Assessing Appreciation of Tangible Assets
Evaluating asset appreciation helps gauge the return on investment provided by the asset. The calculation of appreciation is straightforward:
- Appreciation = Current Value of Asset – Purchase Price of Asset
The current value reflects the asset’s market worth, while the purchase price indicates the initial acquisition cost.
Strategies to Increase the Value of Tangible Assets
Understanding how to calculate asset value prompts the desire to enhance asset worth. Several strategies can be employed to boost the value of tangible assets.
Maintenance and Upkeep
Maintaining assets is crucial for preserving their value and ensuring optimal functionality. Establishing an asset maintenance plan that outlines tasks, instructions, and downtime schedules is essential.
Informed Upgrade Decisions
While upgrades can enhance asset value, their cost and potential returns must be carefully evaluated. Comparing the investment required for an upgrade with the expected returns aids in decision-making.
Utilizing Tangible Assets as Collateral
Enhancing asset valuation facilitates leveraging these assets as collateral when seeking financing. Real estate, inventory, equipment, and vehicles can serve as collateral, providing security for loans.
Choosing Professionals for Accurate Asset Appraisals
When appraising tangible assets, selecting the right professionals is essential. Consider the following when making your choice:
- Qualifications and experience: Ensure the appraiser has relevant experience in your industry and with the assets being appraised.
- Methodology: Verify that the appraisal methodology aligns with industry standards.
- Independence: Choose an appraiser devoid of conflicts of interest to maintain objectivity.
Seek recommendations from trusted sources to identify suitable professionals for asset appraisal.
Conclusion
Tangible assets form the foundation of your business, representing a significant portion of its value. While intangible, these assets are instrumental in sustaining your operations. Appraising tangible assets accurately and implementing strategies to enhance their value can lead to long-term growth and increased company worth.