Every entrepreneur comes across numerous roadblocks during their business venture. These roadblocks and challenges can make your business more complicated than you thought it to be. The rapidly changing business landscape is putting more considerations for business owners to make things right. However, the success of a business depends on the professional’s collective struggle to achieve long-term goals.
As a business owner, you cannot be an expert in everything. You will have to learn a variety of skills to keep your business afloat in the competitive market. Financial literacy is one of the essential skills for making effective business decisions. In fact, the stability of a company depends on the financial status of your business. Most business owners do not like the idea of managing the financial books of their business. They either rely on the accountants or accounting software to get the job done.
However, in the current changing business dynamics having a basic understanding of the financial systems is crucial to get your business off the ground. It is also beneficial to learn about financial models, strategies, and tactics that can help link your business to investors and monitor corporate performance. These may include capital management, financial services, as well as keeping financial assets. Unlike traditional assets, financial assets are relatively distinct and more complex to manage. With that said, let’s discuss everything that business owners should know about financial assets.
- WHAT ARE FINANCIAL ASSETS?
Financial assets are tangible liquid assets that come from contractual agreements or ownership claims. They are also known as liquid assets, as they do not have a physical presence like traditional assets. Moreover, they are the fastest and easiest for conversion into money and offer a fixed value as per the contractual agreements.
These assets maintain their presence in receipts, documents, and certificates that you can convert into real cash. There are two primary purposes of financial assets. The first is to allow people to invest their money for substantial financial returns. Businesses can also invest their savings into another business to claim the ownership of an entity. These ownerships can be either public companies, bonds, or rights to payment.
The second purpose of the financial assets is to distribute the risk between the parties. Most businesses use this approach to finance their business for tangible assets. They pitch private investors that have surplus funds for investments. For that, you will need financial skills and forward-thinking accounting knowledge to finance your business.
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- TYPES OF FINANCIAL ASSETS
As discussed earlier, the financial assets are highly liquid and have no physical presence. The cash present in the bank accounts, cheques, or savings refers to a highly liquid financial asset. Moreover, the legal contracts for financial assets also have a predefined maturity value that states the due date to receive the amount.
Apart from cash equivalents, there are numerous other types of financial assets. Some of these include:
- CERTIFICATE OF DEPOSIT (CD)
A certificate of deposit is the financial agreement between an investor and bank to hold a fixed amount of money for a specific time. The investors can hold this value for a specified duration of six to 12 months. Meanwhile, the company that the investor is financing returns the set amount of money along with interest. These financial assets are the safest investment that assures the money-back guarantee and the issuing bank to pay interest.
- EQUITY SHARES
Equity share is another type of asset financing that involves purchasing any company’s equity or ordinary shares. The company that buys these equity shares can use them as financial assets. At the same time, the company selling its shares will consider it an owner’s equity. This investment provides the investors financial assets and makes them eligible to vote on the business matters that sold these equity shares.
- MUTUAL FUNDS
As the name implies, mutual funds refer to creating a financial pool that collects money from various investors. The assets management company is mainly responsible for managing these funds. It also attracts the investors to invest money and, in return, receive mutual funds. The best part of these financial assets is that they involve low risk because of dynamic funding.
- PREFERENCE SHARES
Preference shares are those issued by a company for increased capital. It includes the characteristics of both equity and debt investments. Notably, these stocks give the rights to the holders to receive the dividends at the contractual agreement. If the company does not makeup to the contract or goes bankrupt, the holders will receive their shares from its assets. Besides, the financial asset holders may prefer to receive funds from these assets before common stockholders.
- INSURANCE CONTRACTS
The insurance contracts are also financial assets for the business. These contracts involve investors paying a premium to the insurance company to receive compensation during uncertain future events. However, the uncertainties could be in the form of sudden fire, injury, accident, or any event that caused you a business loss. The investors will only be eligible to receive these monetary funds at the time of an unfortunate event.
- PROS AND CONS OF FINANCIAL ASSETS
The financial asset is a double-edged sword that has both advantages and disadvantages for the business and individual.
One of the top advantages of financial assets is their high liquid nature. This liquidity is the ability to transform your profits into cash. For instance, if the business owners have cheques as financial assets, they can withdraw them quickly for the mentioned value. Unlike land or other physical assets, they might not have a fixed value and inherent worth based on the market value. Moreover, financial assets offer more security for receiving capital.
The cash funds like cheques or bank balances do not provide the return on investment. Meanwhile, most financial assets inherit the maturity date for receiving funds. Notably, any attempt to receive funds before the maturity date can lead to penalties and low return on investment.
Assets are an essential resource of every business and ensure business stability in the market. Having a good record of assets is vital to maintain credibility and to provide financial security. In today’s uncertain world, assets are the only resource available for businesses to survive and compete in the market. So it is highly advised to keep a check on different types of financial assets to maintain a competent financing portfolio for your business.