Operating Assets: A Business’ Working Capital
Out of all the assets a company has the operating assets are arguably the most important. Without working capital operations cease to exist. A business is only as good as the employees, the saying goes. While this is true; it’s not the whole truth. The operating assets cover tangible and intangible items that allow the company to carry on making an income. Without a machine to build on or the copyright that sets you above and beyond your competitors, your livelihood is as good as gone. The working capital includes several categories that we will explore within the scope of this article.
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Operating assets are important for the health of a business. When investors look at a business they often consider the amount of short-term debt and the value of the operating assets before getting involved. Short-term debt is any debt that is to be paid off within a twelve month period. If you have a high value of operating assets your business is considered a lesser risk because the investor assumes you have the ability to pay off these short-term debts. Contrarily, if your operating asset value is low, the investor will assume (and rightfully so) that the company may have more difficulty generating revenue and thus paying off debts may become more of a challenge.
Consider fixed assets as a subset of operating assets. They include most of the tangible items we will discuss below including property, machinery, tools and office supplies. They are deemed fixed by the International Account Standard (IAS) because they cannot as easily be converted into cash as say, inventory can. They are also not going to be resold to the customer because they are being used long-term by the company to complete business operations. Fixed assets are tax-advantageous because they experience depreciation and under tax law these assets are given a depreciation allowance. Many companies outsource accountants to avoid dealing with the complications that sometimes arise while bookkeeping and paying taxes. Save money by learning accounting through a business lens and do all the work yourself with confidence and accuracy.
Current assets accounts for all of the assets that will be converted into cash with twelve months. This includes, well, cash, inventory, accounts receivable and other liquid assets.
As discussed above, tangible operating assets include all of the equipment used for manufacturing products, the goods used to complete a contract, the inventory you have stocked for sale and of course the property where you run these operations out of. The property is only part of working capital if you own it, so renting a property is considered an operation expense and not an asset. Included in tangible operating assets would be any office supplies needed to complete daily tasks that are fundamental to the income of a business. So basically, look around and if you can’t get the job done without it (and it’s not your employees) count it in. Don’t count, however, old or broken equipment, obsolete technology or uncollected receivables. These do not directly contribute to revenue and therefore are not considered operating assets.
So we know that most things you can touch at work are likely considered an operating asset. But what about those undeniable traits that make your company who they are? Intellectual property is just as much an asset as a desk chair or machinery you own. In fact, a lot of investors and financial advisers are becoming more aware of IP assets and sometime consider them to be even more valuable than physical assets. Things like trademarks, copyrights, patents and trade secrets are all considered intellectual property.
Cold hard cash is one operating asset you don’t want to forget. All of the money sitting in account receivable is considered an asset and you better include it when you are tallying up the total. This cash opens a lot of doorways for you. It shows investors that you not only have $50,000 worth of tangible and intangible assets… but you also have cash to take care of short-term debts and to make smart operational investments for your company. Cash is considered a current asset. In the online course How to Make A Financial Statement learn how to create a cash flow statement for your cash assets.
Net Operating Assets
Now we know what constitutes an operating asset for a company, but the value of operating assets doesn’t mean the company has an equivalent amount of money to spend. If Tim’s Tie-Dye has $35,000 in operating assets, he may only have $4,000 in net operating assets. This means that $31,000 of his company’s worth is either tied up in tangible or non-tangible items or is an operating liability. An operating liability is a debt owed to say a credit card or to income taxes. Essentially, liabilities are everything sitting in the accounts payable department. To get your net operating asset figure you simple need to subtract all of your operating liabilities from your operating assets. In Tim’s case, he has $4,000 that he can spend to upgrade equipment or hire new employees. Tim has his business running smoothly with cash to spare – and you could too. And Introduction to Business may be just the ticket you need.
In summary, anything that directly contributes to the income of a company can be considered an operating asset. To further demonstrate, let’s say Tim’s Tie-dye is a clothing manufacturing business. Tim needs to purchase clothing and dye to create his products. Since these items will be converted into inventory products they are considered current assets. However, the bucket in which he dyes the shirts and the drying racks are considered fixed assets as he will not be selling either of these to the public. He can include both his current assets and fixed assets as part of his total operating assets value. Learn how to create a proper balance sheet for your business finances with this balance sheet example.
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