Assets - how to maximise your financial performance with current and non-current assets

In this article, we will explore what assets are, how they are classified, and how you can effectively manage the types of existing assets to maximize your earning potential and protect your investments.

Publication Date: May 12, 2023

Table of Contents:

1. Assets - definition, classification and their impact on the liquidity and solvency of the business

2. Current assets - definition and their importance in economic activity

3. Fixed assets - what are fixed assets and how they differ from current assets

4. How to carefully analyse assets and optimise your investment portfolio

1. Assets - definition, classification and their impact on the liquidity and solvency of the business

Assets are assets or economic resources that a firm owns or controls and that generate future benefits. They are essential to the operation of a firm and to the generation of income and profit. In accounting and finance, total assets are the resources controlled by a company that have economic value and can be used to generate income in the future. These include physical items such as buildings, land, machinery or equipment as well as intangible resources such as patents, trademarks, software and copyrights.

Assets are essential for any company as they represent an important part of the company's value and can be used to generate revenue and meet its objectives. In addition, assets are important to secure the company's financing as they can be used to secure loans and increase investor confidence. The more valuable assets a company has, the more attractive it will be to financiers and the more financing options it will have.

Assets are assigned a book value which is recorded on the company's balance sheet and reflects its value and development over time. Therefore, proper monitoring and management of assets is essential for effective financial management and to avoid losses or impairment. Assets are a key component of a company's financial performance and are essential to its success and growth.

Asset classification is an essential aspect of accounting and finance that helps to understand and manage an entity's resources properly. They can be classified according to their nature, their degree of liquidity or the period of time over which they are used. There are two main categories of assets: current assets, which include resources that can be quickly converted into cash, such as inventories or receivables, and non-current assets, which are used over a longer period of time, such as buildings, land or machinery.

The importance of asset classification is that it helps to assess the financial position of an entity and to make appropriate business decisions. Proper asset classification can help identify sources of liquidity, assess risks and identify investment opportunities. It can also help to report financial information in a clear and concise manner to stakeholders. Good asset management is essential for maintaining the liquidity and solvency of the business and can bring significant benefits such as increased revenues, improved operational efficiency and enhanced reputation.

2. Current assets - definition and their importance in economic activity

Current assets are a company's assets that are expected to be sold, consumed or converted into cash within a short period of time, usually in a year or less. They include assets such as inventories, receivables, cash and cash equivalents, short-term investments and other assets that are considered liquid.

The importance of current assets in the business is essential to keep the business running and to cover current expenses such as the payment of suppliers, wages and other costs. In this respect, specialist accounting assistance and advice can be essential for the accurate assessment and effective management of current assets within a business, so as to provide a detailed analysis of these assets, identifying possible problems and providing solutions for their optimisation in order to maximise financial performance and ensure adequate liquidity in the business.

These are used to calculate one of the most important financial indicators - the current liquidity ratio. This ratio calculates a company's ability to pay its current liabilities using current assets. They allow the business to pay its current debts and continue trading without major disruption. Moreover, proper management and control of current assets can help improve a company's liquidity and solvency. For example, inventories are an important component of current assets. A business needs to maintain a balance between inventory levels and sales levels. If inventory levels are too high, the company may suffer financial losses because they take up space and require continued investment in them. In addition, too high inventories may indicate that the company is not focusing enough on sales strategy and cost reduction.

On the other hand, receivables are also an important component of current assets. They represent the amounts that customers owe to the company. It is important for a business to keep a close eye on the level of its receivables and take prompt action if customers do not pay their debts on time. By managing receivables properly, a company can improve its cash flow and avoid liquidity problems. They are an important part of a company's balance sheet and can significantly influence its financial performance and future. It is therefore essential that a company carefully monitors its current assets and takes prompt action to optimise their management.

3. Fixed assets - what are fixed assets and how they differ from current assets

Non-current assets are a company's long-term assets that are acquired for use in the business and are not intended to be sold within a short period of time. These include assets such as buildings, land, machinery, equipment and similar assets. Fixed assets are essential to the operation and development of a company, as they enable it to carry on its business and produce goods and services over the long term. They are also often considered an investment in the business, as their values are maintained or even increased over time. They can also be used in production and manufacturing processes, such as buildings, land, machinery and equipment to increase their production capacity and generate profits.

Although fixed assets are less liquid than current assets, they are also important to the long-term success of a company. Companies need to manage fixed assets carefully, as they are long-term investments and therefore a wrong decision to acquire or inefficient use of them can have negative consequences on the profitability and solvency of the company.

An important difference between fixed assets and current assets is the period of use. The main difference between fixed assets and current assets is that the latter are acquired with the aim of being used and sold in the short term, usually in a year or less. Current assets are used in the short term, usually within a business cycle of up to one year, and are designed to be sold or converted into cash relatively quickly. They include stocks of raw materials and finished goods, receivables, cash on hand and other assets that can be converted quickly into cash.

In contrast, fixed assets are intended to be used in the business for a longer period of time, usually more than one year. In addition, fixed assets are often recorded on a company's balance sheet at their cost value, which includes the purchase price and subsequent installation and commissioning costs, while current assets are recorded at their market value or estimated cash receipts. In general, non-current assets are more expensive and require a significant financial investment to acquire and maintain. However, although they are less liquid than current assets, they can bring significant benefits to the business in the long term by increasing production capacity, improving efficiency and reducing costs.

4. How to carefully analyse assets and optimise your investment portfolio

Investing is an essential component in the financial planning and long-term development of an individual or company. In order to achieve favourable returns and reduce risks, it is crucial to carry out a careful analysis of assets and optimise the investment portfolio.

It is important to take the time to define your short, medium and long-term financial goals. These goals may include capital growth, generating passive income, saving for a major purchase or providing a stable income for retirement. By setting clear goals, you'll have a clear direction for your investment decisions and be able to properly assess progress toward them. Also, conduct a fundamental analysis before investing in an asset. This analysis involves evaluating fundamental aspects of the asset, such as the financial condition of the issuing company, the historical performance of the asset, growth prospects and industry competition.

Next, it is important to analyse the growth prospects of the asset. Study the industry in which the company operates and identify factors that may influence the demand and supply of the asset. It is necessary to pay attention to market trends, technological innovations, regulations and other events that may have an impact on the value of the asset. An appropriate strategy may include managing inventories and debtors, constantly assessing cash levels and financial investments, and monitoring the cash flow of the business.

In addition to these internal measures, specialist accounting advice can be essential in this regard. Specialists can provide advice on optimising cash flow and asset structure, identifying and mitigating associated risks and improving the overall financial strategy of the business. In addition, through accounting advice, such as that offered by Mazars in Romania, you can benefit from the expertise of accounting professionals in the correct interpretation and application of current financial and tax legislation, ensuring that your business complies with all legal requirements.

Accounting and financial and tax reporting are also particularly important for any business. They ensure a clear and accurate record of a company's financial situation and profitability. By law, financial and tax reporting is mandatory for all companies, and failure to do so can have serious consequences, including fines and financial penalties or even closure of the business. It is therefore essential that proper attention is paid to accounting and financial and tax reporting to ensure the smooth running and long-term success of the business.

By managing assets in a strategic and responsible way, the aim is to maximise their value, minimise risks and optimise the overall performance of the business. This process involves constant monitoring and evaluation of assets, making informed decisions regarding their acquisition, use and replacement, implementing effective asset management policies and procedures, and tracking performance and adjusting strategies in response to market objectives and conditions. By managing assets in a rigorous and well-structured manner, it provides a sound basis for financial decision making, increasing operational efficiency and strengthening the organisation's competitive position in the marketplace.

In conclusion, assets are the valuable resources of a business and play a vital role in maximising its financial performance and sustainable development. Whether we are talking about current or non-current assets, their effective and strategic management is key to achieving long-term success.  With a clear understanding of the definition and classification of assets, we can identify the importance of each within the business. It is important to approach asset analysis and investment portfolio optimisation as a continuous activity, adapting to changes in the market and always looking for opportunities for growth and improvement. In addition, by carefully managing your assets and optimising your investment portfolio, you can create a solid framework for the financial success and sustainable development of your business.

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.