Beyond the balance sheet: what are fixed assets and how do they fuel your business

Sustaining a robust financial foundation is as essential as a well-oiled machine for your company’s smooth operation and growth. One key component that businesses, especially SMBs, may focus on is fixed assets. Whether you’re looking for business expansion, or aiming to optimize assets management - understanding and effectively utilizing them can provide a strategic advantage.

In this article, we’ll delve into what fixed assets are, covering their core principles, their importance, different types, and practical examples.

What are fixed assets, the backbone of your business?

Fixed assets are typically long-term assets acquired to support a company’s operations, not for sale. It means they aren’t easily liquidated in the short term, but used internally by the business. These assets typically include facilities, equipment, and intangible assets.

Here are their key characteristics:

• Durability: fixed assets are intended for long-term use in business operations. 
• Limited liquidity: unlike current assets, fixed ones aren’t easily converted into cash.
• Depreciation: most of them (except for land) decrease in value over time due to wear and tear or obsolescence.
• Strategic importance: they play a pivotal role in a company’s growth, expansion, and stability. 

Fixed assets are usually held by companies for more than a year and contribute value to the business over time, rather than being quickly converted into cash. Can they be sold? Yes, but usually only after their lifecycle ends. Just keep in mind that depreciation must be recorded in financial statements to reflect the asset's progressive value reduction. 

This is what every SME owner needs to know about interest rates and the cost of borrowing, especially for those seeking to finance fixed assets. 

Understanding what fixed assets are may help you make more strategic and assertive decisions about financing and depreciation.

Why do fixed assets matter for your company? 

Enhancing growth and expansion

Modern machinery and facilities can boost production capacity to meet higher demand, signaling financial health and growth potential. For SMBs, this attractiveness can lead to more opportunities for financing and expansion, as it increases attractiveness to investors and creditors.

Do you want to explore funding options for your business? Here are 6 options for funding your small business.

Operational efficiency

Efficient delivery vehicles and advanced technology optimize workflows and processes, reducing operational costs and expenses. Additionally, operational efficiency increases productivity and leads to better performance.

Stability and security

These assets also provide a solid foundation for growth. They are essential during economic uncertainties, ensuring that businesses continue their operations.

Revenue and strategic retention

Beyond operational benefits, they generate long-term revenue. Therefore, they support more accurate decision-making. In a severe economic crisis, for instance, selling a fixed asset might not be the best choice, considering its enduring value and potential returns. 

Boost your supplier relationships with strategies that can help your business manage and optimize its fixed assets more effectively. 

Types of fixed assets: tangible and intangible

As the name suggests, tangible assets are those you can see and touch, providing a solid base for your operations. For example:

• Land
• Buildings
• Machinery and equipment
• Furniture and fixtures

On the flip side, intangible assets do not have a physical form and refer more to intellectual property and brand recognition, such as:

• Software
• Patents
• Trademarks
• Copyrights

However, this classification can vary depending on the business activity. Let's use a tractor as an example. On one hand, it’s an inventory for a company that supplies this kind of vehicle. On the other, it’s a fixed asset for a farmer who uses it for cultivation.

Practical fixed assets examples 

It's much easier to understand the types when we see them in practice, right? Here are some fixed assets examples that might resonate with your reality.

Land

Unlike most assets, land or buildings generally don’t depreciate and may even increase in value. Therefore, they’re valuable for the business, including future expansion planning. In practice, it's the land where your company is located and can later serve to build additional facilities.

Machines and equipment

These are the items that keep your business running. A manufacturing company, for example, can have different types of machines and equipment for producing its goods, like assembly lines, forklifts, and computers. Remember: the more modern the machinery, the more efficient and cost-effective the production will be.

Software

Software, regardless of its purpose, simplifies operations, increases productivity, and provides a competitive advantage. A technology company, for instance, may use a specific one, like a development platform or a customer relationship management (CRM) system, to manage operations more efficiently.

Does your business invest in software and other intangible assets? Check how to transform an online business with these 6 eCommerce tools.

Furniture and fixtures

These include desks, chairs, and other furniture like cabinets and lamps. These assets create a more functional and comfortable work environment.

Other intangible fixed asset examples

Finally, a company can register patents for its products to prevent others from copying their design or have registered trademarks in its name and logo. This gives you exclusive rights for identification and prevents others from copying your designs.

How to account for these assets 

When a company acquires a fixed asset, it usually includes it as Property, Plant, and Equipment (PP&E) on its balance sheet. However, it’s also common for SMBs to lease instead of buying them. Even so, they must be declared, whether owned or not.

Actually, according to ASC 842, a rule issued by the Financial Accounting Standards Board (FASB), lessees must record assets and liabilities for leases with terms longer than 12 months.

How to calculate it

Both tangible and intangible must be listed on the company’s balance sheet. There are specific formulas to proceed with this calculation. 

To calculate net fixed assets, subtract accumulated depreciation from the gross value of the fixed assets:

Gross fixed assets − accumulated depreciation = net fixed assets

To determine the net assets owned by the client, the liabilities are also deducted:

(Total fixed asset purchase price + improvements to the assets) − (accumulated depreciation + fixed asset liabilities) = net fixed assets

Note that the lifecycle of fixed assets includes acquisition, depreciation, maintenance, repairs, and disposal, and it’s essential for accounting to reflect all these stages.

Finally, we have the turnover ratio, an efficiency metric that compares net annual sales to the net value of fixed assets:

Net annual sales ÷ (gross fixed assets − accumulated depreciation)

Ideally, the result should be above one, as it suggests efficient use of fixed assets.

Optimize your fixed assets for success and take your business to the next level with us

Being aware of what are fixed assets goes beyond just the numbers on your balance sheet. They are the engines that provide a solid foundation for efficient operations and business expansion.

Ready to take the next step? At Stenn, we offer tailored financing solutions to help you make the most of your fixed assets. Whether it’s investing in new machinery, software, or expanding your facilities, we’re here to support your journey. 

Explore our services and team up with us for sustainable business growth. Don’t let financing hold you back — partner with us and unlock your company’s full potential today.