One of the greatest lessons that I have had to know as an entrepreneur is the actual way that money works in a business. Most individuals begin their businesses with excellent ideas, enthusiasm, and energy but fail to make a living due to the lack of clear knowledge regarding assets and liabilities.
I have long believed that one could work hard and that was all. However, with time, I have discovered that knowledge about assets and liabilities is what distinguishes between companies that grow and those that are always struggling. This information has altered my decision-making process, money spending, and future planning.
In extremely basic terms, assets refer to things that place money into your pocket, whilst liabilities refer to things that remove money out of your pocket. This definition has enabled me to look beyond the ownership as an entrepreneur.
An asset is not merely something that appears to have a high value; it is anything that brings profit or improves in value with time. Conversely, a liability may not necessarily look bad; it is anything that constantly costs you money without any returns. This mere knowledge can help an entrepreneur to avoid numerous financial errors.
There are various forms of assets in business. These are cash, income-generating equipment, fast moving inventory, investments, intellectual property and even skills that enable the business to have more earnings. As an example, one of the assets is a delivery bike that is used on a daily basis to earn income.
An attractive customer pulling site is an asset. I have also understood that knowledge can be an asset even when it can enable me to make better decisions and not to make losses. The important aspect of assets is that they generate revenue at present or can generate revenue with a great probability in the future.
Instead, liabilities are usually covered up as accomplishments or success. Liabilities may include expensive offices, fancy cars, unwanted subscriptions, loans with high interest rates, and others that do not directly relate to earnings. Being an entrepreneur, I have come to realize that not all things that I can afford to purchase are things that I ought to purchase.
A loan that is taken to grow business and make more money can be useful but a loan that is taken to impress people or sustain a lifestyle is a burden. Liabilities are cash draining and can cripple growth unless managed.
The ability of successful and failing entrepreneurs to balance between their assets and liabilities is a big difference. Effective entrepreneurs are known to amass assets in the first place and liabilities later. They have easy, yet effective questions such as: Will this purchase generate more cash? or Will this decision enhance my cash flow? I came to learn that business becomes more stable and stronger when its assets increase at a higher rate compared to their liability. However, as the rate of liability increases, it strains the business making it susceptible.
The reality of assets and liabilities lies in the cash flow. A business can seem successful externally but when the income is being consumed by liabilities, then the business is not strong. I have understood that to have positive cash flow, it is best to have more assets than liabilities.
This is the reason why entrepreneurs need to analyze their revenues and expenditures. Following up with money on a regular basis will assist in identifying the assets that perform and liabilities that are supposed to be minimized or eliminated altogether.
The knowledge of assets and liabilities also contributes to long-term thinking. I am now able to think larger than the profit of the day because as an entrepreneur, I cannot afford to think small. I look at the business in the next five or ten years in the context of the decisions made today.
Money may be spent on investing in training, systems, and tools that enhance efficiency but to many of them it is an investment that may turn out as an asset in the long-run. In the meantime, continuously increasing the cost of lifestyle without the expansion of the business will provide additional strain and stress.
Finally, it is not a choice of an entrepreneur where he or she understands the working of assets and liabilities but a necessity. This is the knowledge that develops discipline, clarity and confidence in financial choices. My entrepreneurship experience has taught me that the latter is not about money making but also about maintaining and sustainable increase thereof.
When an entrepreneur is interested in creating assets and managing liability, the business becomes more stable, free and capable of developing in a sustainable manner. This knowledge has changed my perception of success, and it has remained the same until now in my entrepreneurial process.
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