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Security dealers and integrators are sometimes perplexed when it comes to leveraging their assets to grow their business.
The starting point for leveraging your company assets is to take inventory of resources. These will typically fall into three categories: current assets, long-term investments and fixed assets.
Current assets are cash and other items to be converted to cash, sold or consumed within one year or in a normal operating cycle. Examples are short-term investments, receivables, inventory and prepaid expenses.
Long-term investments are typically held for many years. These usually consist of securities (bonds, stock), fixed assets not used in operations (land held for sale), special funds (pensions) and ownership in subsidiaries or affiliated businesses.
Fixed assets are purchased for long-term operation in earning profits for a business. This category can include land, buildings, equipment and tools.
The value of these assets is what a third party will loan your company for a return in the future and this provides the opportunity for leveraging.
Use it or lose it
It is critical to analyze your assets to ensure they are helping your business. Do they produce a clear, sustainable and measurable value? If necessary, eliminate any asset that is no longer a viable addition to your financial and operational needs. Examples are bad investments that are losing money or equipment that you don't use.
There are several options for leveraging assets with two of the most common financial loans and factoring. Financial loans are money that is reinvested to earn a greater rate of return than the interest cost. For example, if you use $5,000 of your money and $5,000 of borrowed money to make a $10,000 investment and you sell for $15,000, your return is $5,000 on a $5,000 investment, or 100 percent. The potential for loss also increases because if the investment loses value, the loan principal and accrued interest still need to be repaid.
Factoring is based on the multiplication of current account monthly revenues by the number of months a third party is prepared to pay. For example, if you have $1,000 per month in billable revenues from clients and a third party will pay you 36 times this amount; you will receive $36,000 upfront. Note that this method often takes you out of the ownership position of the accounts and may increase risk of future growth and sustainability with these clients.
Consider these three points to control your assets and make them work for you:
- Make wise decisions when investing your money. Consult a financial planner to assist you if you are not savvy with different types of investments and the stock market. Design a portfolio to meet your financial goals and long-term strategies to obtain a comfortable return for your business.
- Track your fixed assets. Asset tracking software is now available to monitor assets and their locations, persons using them, checkout and return dates, maintenance schedules and cost and depreciation. As a result, businesses maintain assets through loss prevention and better equipment maintenance.
- Assess your financial position before borrowing funds. Draw up a cash assessment to analyze your financials thoroughly before going to a lender. You must be able to achieve a strong return on assets to meet the payback requirements and make a profit. If operations decline, there may not be sufficient cash flow to meet the required interest and principle payments.
Leveraging your assets can lead to greater profitability and improved company viability. Although there are some risks associated with leveraging your assets, the financial rewards can outweigh the negatives and help you grow your company.
Always remember to consult a financial advisor or certified accountant for your specific needs.
Cathy Rempel is president and chief executive officer of The Summit Group in San Diego.
author: By Cathy Rempel