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How To Manage The Total Economic Value Of Your Assets

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In an economic sense, all receivable and payables are grouped together as assets while the collectibles are classified as liabilities. Another approach to classify them is by segregate them according to cost and profit. For instance, the commercial real estate properties that are the assets of the business are usually placed under the category of tangible assets, while, the commercial properties that are the liabilities of the business are normally put into the category of intangible assets. One important thing that should be kept in mind always is that the two categories are not the same and should never be treated as so.

A financial statement will always include both categories of assets and liabilities and thus it is very important to have a correct balance between them. A good example is when a company sells a particular asset to raise funds for its operation. In this case, if the amount raised is less than the cost of the asset, then the difference between the cash outflow and the cash inflow is termed as the profit of the company. However, if the profit is much higher than the cost of the asset, then it is known as the loss accrual and it affects the balance sheets of the company.

The financial statement thus shows the cash flows and the asset balances. It should be noted that the cash flows are an integral part of any balance sheet and hence it is also referred to as asset liquidity. The term ‘liquid asset’ in this context means the stocks, shares, commodities, bank depositories, accounts receivable and accounts payable that are capable of being quickly and easily converted into cash without requiring too much time for the conversion process. Thus, assets such as accounts receivable and accounts payable form the base or raw material for converting the assets into cash.

Asset Liability Management (ALM) is a key function of every organization that involves maintaining the balance sheet as well as assessing the ability of the business to make payment to its creditors in a timely manner. The purpose of ALM is to reduce the effect of financial ratios on the net worth of the organization. The overall effect of all financial ratios is evaluated by the management in order to provide the best possible solution to the problem. For instance, in the case of a business concern that has substantial inter- related debts and expenses, it may become difficult to determine the effect of its current assets and its long-term liabilities on its net worth. Hence, for this purpose the overall debt-to-income and net worth ratio are evaluated by the Finance department.

One of the main functions of Finance management is to evaluate the effect of cash on current assets and current liabilities. The concept of cash flow is also known as cycle management which is used to evaluate the inter- relation of cash cycles. The cycle is defined as the pattern in which cash is generated from sales or assets or is generated from consumption, with the difference coming in the payment of the cash debits and cash payments made to the business concern.

It is important to define the total economic value of an asset. This total economic value includes only the net present value of the cash flows associated with the assets. Net Present Value of an asset is determined by subtracting current income taxes and capital gains charges from the net present value of the total assets. Assets include tangible and intangible assets such as goodwill, property and fixed assets.

A major part of the total economic value of an asset relates to the depreciation. The amount of depreciation relates to the age of the tangible assets. The rate of depreciation also varies with the period of ownership. One of the common ways of measuring the depreciation is the replacement cost method.

One of the ways to manage the total economic value of an asset is to reduce the expenses incurred to value the asset. Reducing expenses will result in the increase in cash flow and reduce debts. One way to reduce expenses is to sell the asset if it is not being used to satisfy the liability. However, it is wise to hold on to assets that will increase the company’s cash flow and increase its market value.

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