Money or Assets: Measuring Your Business Health

It is likely your business has both money and assets that aid in handling day-to-day operations, but these factors of financial health are not equal for every business.

You will often find that money (cash) provides your business with more financial flexibility than assets – this is because money is liquid whereas assets are tangible.

For a business to retain healthy finances for day-to-day operating – and ultimately, less risky business growth – it is important for business owners to understand how much of their company’s value is made up of money or assets.

While both are indicators of business health, it is important not to remember that other factors – such as profitability, revenue growth and debt levels – also play a role.

Understanding how to measure your business health by analysing your money and assets will help inform the building blocks of budgeting, spending, and which type of loan you should consider to help push your business forward.

What are business assets?

Business assets refer to any item of value that is owned by a business. These items can provide long-term benefits or generate income on the business’s behalf.

Some of these assets are referred to as “current assets”, short-term resources that can be converted into or generate cash. Examples of these include inventory, stocks, money owed to the company (accounts receivable), and other assets that can be converted to cash within a fiscal year or operating cycle.

In contrast, “non-current assets” (also known as fixed or long-term assets) are assets that a business expects to hold for more than a year. These assets support business growth and are an integral part of a business’s operations.

Non-current assets are most often tangible items, such as property, equipment, machinery and vehicles. However, although less common, they can also be intangible, such as a patent.

Is it better to have cash or assets?

A range of assets support the growth of a business in a number of ways: enhancing operational efficiency with high-value machinery (a non-current asset), selling stock for daily revenue (a current asset), help with expansion when purchasing new property (a non-current asset) and more.

Assets like these allow a business to operate, and therefore generate revenue. Tangible assets, like equipment, property and machinery, will facilitate business operations by allowing the business to produce goods and offer services.

Assets – and the type of asset (current or non-current) – can be deemed more or less important to a business’s revenue and growth depending on the business’s sector .

For example, a company working within the advanced manufacturing sector – such as a non-destructive testing business – will be more reliant on specialist non-current assets to complete their work and generate revenue.

However, a business in the service sector – such as a consultancy firm – may be less reliant on non-current assets to provide revenue (apart from standard office equipment).

Depreciation and amortisation

Depreciation is the reduction of a tangible asset’s value, caused by wear and tear, age, asset obsolescence and other factors. A good example of this is the depreciation of a work van’s value over multiple years of use and wear from high mileage.

Amortisation is the gradual writing off of an intangible asset’s initial cost over its lifetime. In other words, it’s a way of spreading out the cost of an intangible asset. For example, if a business takes out a manufacturing patent at the cost of £5,000 for five years, it would record the expense as £1,000 per year. This can help a business account for the decreasing value of its intangible assets when analysing the financial health of the business.

What are the types of profit?

There are three main types of profit for a business:

• Gross profit: the difference between revenue from sales and the cost of sold goods. This is useful for gaining insight into basic profitability. It is calculated by taking the gross profit – the cost of goods sold.
• Operating profit: the profit a company makes from regular business operations, excluding non-operating income, interest or taxes. It is calculated by taking gross profit – operating expenses.
• Net profit: the total profit of a company after all expenses have been deducted from the total revenue. Calculated by taking total revenue – total expenses.

Why profit is important

Profit is crucial for a business’s survival, but understanding where your profit comes from will inform how your business can grow, expand, reward employees and more.

This is why calculating and carefully interpreting the three main forms of profit can help you measure your business health.

However, these actions can also be fuelled via external capital – such as commercial finance .

Commercial finance can provide businesses with the funding they need to expand operations if they are currently short of the money needed, but are in good financial health. This is advantageous in allowing businesses to respond to positive market trends and unforeseen opportunities they could not plan for in advance.

Which is better for measuring business health?

Whether money or assets are better for measuring business health will depend on the sector you are working in and the scale of your business.

Money is best for calculating short-term health and is most beneficial for businesses with high operational costs or fluctuating revenue streams. In particular, this means that, for hospitality, retail, and seasonal businesses with varying periods of revenue, profit is the strongest measure of business health.

Assets are best for calculating the long-term health and stability of your business, as both tangible and intangible assets will indicate long-term value through their potential to generate income. Asset-heavy businesses will most benefit from calculating business health this way, in particular advanced manufacturing, construction, real estate and more. These assets can still depreciate, however, and this must be taken into account.

When calculating business health with money, it’s important to remember that cash can also lose value due to inflation. You must consider the wider context and implications regardless of whether you calculate financial health through profits, assets or ideally both.

In short:

Money: the preferred option for businesses that need strong liquidity to maintain operations.

Assets: the preferred option for businesses that value long-term growth or rely heavily on assets to perform daily operations.

Need help managing your cash flow?

Get in touch with Anglo Scottish today if you need help managing your cash flow.

Our commercial finance experts can help broker finance for businesses of any size, as well as offer advice on cashflow funding , merchant cash advances and growth expansion schemes .

Call us on 0191 410 4776
Email today at enquiries@angloscottishfinance.co.uk