Explaining assets and liabilities is my mission in this week's I Hate Numbers podcast, episode 140. It’s not recommended practice, certainly mine, to operate without considering its assets and liabilities.

However, what do these terms actually mean? In this podcast, I'll break down what constitutes a business asset and explain some of the most common liabilities businesses face.  We'll also provide some tips on how to manage your company's finances effectively.  So, if you're looking to get a better understanding of your business' financial standing, read on!

When running a business, it's important to understand the difference between assets and liabilities.  An asset is anything that adds value to your business, while a liability is anything that detracts from it.  In this blog post, we'll take a closer look at what constitutes an asset and a liability and give you some tips on how to manage them effectively.

Summary

Some of the reasons for Explaining assets and liabilities is

• Firstly, looking at the financial health of your company
• Secondly making good decisions for your business
• Thirdly empowering business owners and management

If you're interested in learning more, be sure to subscribe to I Hate Numbers podcasts, where I go into much more detail on all things accounting and finance related.  Thanks for listening!

Good to know

Are you ready to have an easier and more rewarding relationship with your numbers?  My book, I Hate Numbers helps you get there.

This book is based on my 27 + years in business, helping thousands of businesses survive and prosper.  Furthermore, it is an easy, humorous but serious read about running a business, having a financially rewarding relationship with your numbers, Furthermore, my book will help with that battle between the ears, that all business owners experience.

Get in touch with us to help make your life easier and stress-free. Contact us if you need help figuring out and sorting your numbers, creating your future financial story plans, your tax, payroll and other accounting and business matters.

Getting your Finances in Order is key to a successful business.  Find out more by checking out Numbers Know How 

Business jargon. There's just no getting away from it. Whether you are an owner or a partner management team making decisions, jargon is not something you can escape. And two particular words, two particular bits of jargon that I'm gonna go through today are assets and liabilities. I'm gonna go through what assets are,

what liabilities are, how we can recognize them and why they're so important and why they're so powerful in terms of understanding them for business.

You are listening to the I Hate Numbers podcast with Mahmood Reza. The I Hate Numbers Podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

Hi folks. My name is Mahmood. I'm the founder, director of the accounting firm I Hate Numbers and also the financial storytelling platform Numbers Knowhow. My mission over the last 27 plus years, with the thousands of businesses that I've helped is to increase financial understanding to help win more battles than one loses between what goes on between our two earlobes.

Also to help businesses make more money, save time and tax, and have the businesses they aspire to. That's a pretty good objective if I do say so myself. Let's crack on with the video. So, the idea of assets are they satisfy and they've got three essential ingredients mixed in with them. Number one, they are fundamentally a resource that is owned or controlled by the business. Number two,

that we are likely to get benefits from having that particular resource. Number three, we can put number, we can actually measure what the value of those particular benefits are. That's the first three things that we need to take on board for assets. The liabilities is, I'm not a big fan of that particular term myself.

But essentially liabilities are debt - monies that are owed to our outside parties. So with our starting definition here, and we're gonna dive deeper as well, let's think about assets and let's think about liabilities and to help us, what I'm gonna do, we're gonna dive in deeper and we're gonna take the example of a restaurant.

Now with a restaurant, it needs to make sure before it can start selling food to its customers, before it can start generating profits, which is the name of the game. It needs an establishment, it needs a property of some description. So let's assume it's a restaurant that's got people coming in to dine. So what it needs, it needs cooking equipment.

It needs microwaves. It needs ovens. It needs a cooker. It needs the whole kitchen kitted out here. Now, those assets, those resources that it has are there for the purpose of actually making the food, preparing the food, and providing that wonderful dining experience. Now also, It's all very well having a beautifully designed kitchen, but you also need to make sure you've got food that you can prepare and sell on to your diners.

So the restaurateur will go out and buy ingredients and with those ingredients, and they will transform those into a meal, ready to be eaten by their diners. Now, those two that will lump of things that we've just described, those kitchen equipment, the food ingredients, here, they are called assets. That's a nice generic umbrella term

describing more of them. Now, more particularly if we wanna dive a little bit deeper here, those group of assets can be subdivided into two groups. That's what will we do with accountants? We always like to classify and we like to put things into buckets. Now, those two groups that we're gonna have, the ones that we tend to hang onto, the ones that are permanent within our business, that we tend to retain to help us generate the value to help generate the profits are called fixed assets. Now the idea of fixed assets is not that it actually bulges to the floor,

but they're actually there to be kept within our business here. So the cookers, the microwave, the ovens, or the kitchen equipment that we've got will be classified as fixed assets. Now, what we generate value from is the preparation of the food and providing that to our customer. So the raw ingredients or the ingredients that're going to our meal are called assets, by all means, but they're also called current assets.

And the whole idea of current assets is they transfer into cash eventually, so when we sell our meals to our customers, it will either pay us for cash. Always nice to hear that. Nice to see. Cash is an asset, but it's called a current asset. Now, it may be that we got some outside diners. We've got some commercial customers, and we may be selling food to them outside catering, but they all want credit terms and it might be they pay our bills after 30 days.

Now those customers who owe us money, even though we sold them the food, even though we've done the actual service preparation and delivered the food to them, are also called current assets, and specifically they're called debtors. And what is it about accountants? If one word exists, we'd like to invent others.

So if you hear the word debtors or accounts receivable, it's the same idea. So now we've got a bunch of assets, we've broken them down into two broad categories. We've got those fixed assets, and we've also got our current assets. If you think outside of that, different industries will have different things. So a motor dealership, for example, will have a showroom.

That showroom will be classified as a fixed asset that's there to display the cars, things it's got like the counter tops or the reception area. All the items in there, the lighting, et cetera, will also be part of the fixed assets of that business. All businesses largely will have fixed assets. Some will have more than others.

So typically in manufacturing, telecommunications, transportation, the level of fixed assets will be far greater. Most businesses will have current assets as well. So even if you've got money in the bank, money in the bank is a current asset. You're gonna have it in there, you're gonna dip into it and you're gonna use it.

So that's the assets that we've taken care of. Now, what about the liabilities? Now, liabilities are represented by debt. So where we owe monies to somebody else, those are classified generically as liabilities. Forget about common English, forget about what you mind say in conversation. We're entering the world

of accounting and finance here. So we have a slightly different take on the words that we're using. Now, when we look at liabilities, liabilities where it's money owed can make a whole bunch of them. It could be loans that you borrowed. It could be higher purchase agreements. It could be leases on vehicles and machinery that you've obtained.

It could also be bank overdrafts. It could be money that you owe to a supplier for goods and services that you procured. Now, within those liabilities, we also break those down into groups, and the two groups are long-term, and in the world of finance and accounting, long-term is classified as any debt that has to be paid back after more than 12 months.

So typically a mortgage could be classified as a long-term liability. Come back to the mortgage in a moment. Loans, HP agreements and the like, will all be classified as long-term liabilities. But just pause that for a moment here and think about the payments that we've gotta make in the next 12 months. Now, current liabilities, by the way, are short-term and in the world of finance and accounting a short-term debt,

a short-term liability is anything that has to be paid within 12 months of the end of your period of time. So typically when you buy goods from a supplier, the supplier may give you 30 days, 60 days, whatever those credit terms are, that represents a current liability. If you don't pay them back within that 12 months, then there's gonna be some very interesting conversations taking place between you and your supplier.

And in a worst case scenario, they're gonna get very upset and they're either gonna stop supplying you or take you to court or both of them. Bank overdrafts would also be classified as current liabilities, monies that you owe to your staff for unpaid wages, monies that you owe to any supplier. For example, accounting services that haven't been paid.

Those are also classified as current liabilities. Now, let's go back to these ideas of mortgage and the loan. Now, if you take out a mortgage on a property, weirdly, the mortgage itself is, could be a 25 year mortgage, and typically the mortgage company will want something paid back from you within the next 12 months.

So the next 12 months worth of repayments are current. The remaining 24 years of that mortgage term becomes a long-term liability. If you think about the property that we mentioned earlier on, the property, the fiscal thing itself is an asset, more specifically, a fixed asset. We've obtained that by way of the mortgage and we've got, therefore, a long term and a current liability as a result.

Now, within the context of assets, by the way, assets aren't always physical. You can't always see them. You can't pick them up, you can't touch them and you can't see them. For those that you can physically see, touch, feel, those are called tangible assets and we've got things like vehicles, PC equipment, machinery, plant.

Those are all generically described as fixed assets. Now, intangible assets are things like goodwill on a business that you buy, could be copyrights, trademarks, patents, intellectual property. Those are all examples of intangible fixed assets. So folks, why does it matter? Well, the name of the game is if we imagine a seasaw and you've got assets on one side, you've got liabilities on the other hand,

ideally, you always want more assets than you've got liabilities. Imagine yourself as a, an individual householder. If you look around you and you add up the value of your house, all your furnishings, your fittings, money in the bank account, top them all up. Hopefully you've got more items of value, i e your assets.

Then you have got debt i.e. money owed to people, credit card, overdrafts, loans, and the like. Now, in the context of a business, the more profit that you make, the value of the assets go up, good news, the less your liabilities are. So the more you can pay down debt, then the bigger the value of your business will be on paper, which is what we all want if we're in business.

Remember the name of the game in our business is making profits, generating value as much to reward ourselves, but also so we can continue to deliver our why and we can thrive, let alone survive. So folks, I hope you found this useful. So to think about the idea of assets and liabilities, have a root around your own business and identify what do you have in your business that is

an asset. What you have in your business that represents a liability I'd love to hear your feedback, folks. Until then, happy counting. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week for another I Hate Numbers episode.