The purpose of a business is to build assets that produce income. If you are really serious about building assets in your business then you will need to form a perpetual entity by incorporating.
The corporation is the funnel that holds all your income producing assets.
You can talk to a lawyer as they are in the best position to help you in this area. As an accountant I am more concerned about the financial and tax implications of choosing one structure over the other. Once you incorporate, your business becomes a person of its own and it’s the one big asset that holds your other assets.
There are 2 types of assets a business can build:
1. Tangible assets
2. Intangible assets
Tangible assets: are assets that have a physical form and have an explicit value. They could be held in the short term or long term. Some tangible assets are cash, prepaid expenses, investments, property and equipment.
Intangible assets: are assets that do not have a physical form and estimating a value for them is very difficult. Intangible assets include things like patents, trademarks, copyright, intellectual property and brands.
Anyone can create a product but creating a brand around your product takes time and stamina. A brand is the foundation on which all your other marketing lies. Creating a consistent experience for your audience is part of what makes them loyal to you. A brand is strongly linked to human emotions and until you are able to invoke emotions in your audience you have not created a brand. The collection of systems you have in place is what creates an experience for the customer.
Ways to value your brand:
Market Approach: is based on what businesses with similar brands have sold for.
Cost Approach: this is an estimate based on how much it will cost to recreate the brand.
Income Approach: this estimates the future income you could earn from the brand. This amount is presented on the balance sheet at net present value i.e. what it is worth today?
Tangible asset is another way to build assets in your business. As part of your business strategy you could choose to invest in other businesses, real estate, revenue producing property and equipment, etc. The possibilities are endless if you just learn to think beyond the daily grind.
The importance of assets in a business
In building a business, assets will need to be acquired to make revenue production possible. Revenues come from assets. An asset is defined as the costs we have in our business that is used to produce future revenue.
The main point of a business is not just to generate revenue but to build assets over time. A business that only generates revenue but retains no asset, is a system that will be blown away with every wind that blows against it. A sustainable business is one with large enough assets that keep producing revenue with little interference from the founder(s).
Each asset has a business and has a life time it is expected to produce revenue. There are 3 ways, businesses build assets over time:
- Past earnings – AKA retained earnings.
- Capital investments.
We often hear businesses tout how much revenue they make. Honestly, I think total revenue is the least important measure on how well a business is doing. If you net $1,000,000 in your business this year, should that be considered good or bad? Well, we don’t know until we hold it against relevant financial ratios. Financial ratios help us understand our business performance. If the 1 billion dollars in asset was used to produce 1 million in net profits, then we have a problem. However, if 500,000 in assets were used to produce 1 million in net profits then we are doing quite well.
The efficiency of the assets you accumulate is measured by the return on your asset. Return on asset is measured by net income divided by total assets. So if you made 10,000 last year and your total assets were 5,000, your return on assets will be 10,000/5,000 = 200%. This means that you were able to double the amount you started out with. Your assets are being put into good use.
In summary, without assets you do not have a business. Businesses can be made up of tangible or intangible assets. Both tangible and intangible assets have the capacity to generate revenue without the owner’s intervention. Your goal as a business owner is to keep building revenue generating assets so you can eventually become financially independent. By financial independence, I mean you do not have to keep working to earn a living.