Hey Founders! It’s been a minute!
First, happy new year! How is your business going? Have you analysed your 2019 books? (if you read my last article on The Essential Art of Bookkeeping, you now understand what I mean by ‘books’). If you haven’t, it is imperative that you do — compute your overall revenue in the year and check it against your overall expense. Did you get a positive figure afterwards? If yes, Congratulations! If not, check up on why you didn’t remember our conversation on saving cost. You should check that article again.
Today, I would like to talk about your business assets. I want to highlight that your business assets should not be mixed up with your personal assets. An outstanding rule of business is:
Always treat your business asset as a separate entity, a separate person different from its owners.
So if there’s a car you use for your business, the car is strictly for the business and not for your personal use (sorry, I don’t mean to sound harsh).
How to Identify Your Business Assets
I will start by defining what assets are.
Simply put, an asset is anything that contributes to your revenue generation. For instance, that generator you use to power your machines is an asset. The machines used in the production process are assets, including your computer. Assets used for start-ups are usually tangible. There are intangible assets too but you would need an expert to evaluate them properly.
As expected, unless you own the land or building you operate from, almost all classes of assets depreciate, with the exception of land. This implies that while you are enjoying your asset, keep it in mind that one day, this asset will no longer work effectively for your business and will require a replacement (that is, when depreciation sets in).
So every month, while “keeping your books”, set some money aside as budget for depreciation of your assets. Record it as an expense and tag it ‘depreciation’.
When you evaluate your asset, always factor in the cost of depreciation.
Value it as: Cost of asset minus depreciation.
You can get the monthly depreciation value by dividing the cost of your asset by the expected number of months it will last.
I know this topic seems a little complex but you need it as your business scales. So in summary
Asset value = Cost — Depreciation
Depreciation = Cost ÷ Number of months
Thank you very much for stopping by. Please write your questions in the comment section if you need more clarification.
Keep building. We are rooting for you!