Assets and Liabilities

Assets represents what a company owns and this can be defined in three categories: current assets, capital assets, and other assets. Current assets include cash, inventory, and accounts receivables. Cash in the bank (our favorite and most liquid), inventory on hand and ready to sell, and A/R tell a company's story of liquidity. Capital assets provide operating capability for a company, are more permanent that current assets, and tend to have value for many years (can also be depreciated). Capital assets include property, machinery, and equipment. In the other category lies my favorite, the difficult to define and possibly the heart of risk in business and investments, GOODWILL. In running my own business over the last 6 years, I have become familiar with these concepts (though I could use more learning here) through success and, more notably, failure. In understanding current assets, I have grown from trying to build more digits in my bank accounts to investing the funds in short-term cash instruments such as CD's, MMA, and Treasuries to mid-term instruments such as bonds and equities to long-term instruments such as real estate. This has helped returns. In managing accounts receivable, I try to work within a shorter repay period than the credit extension granted me by my suppliers (typically 30-42 days). Managing this spread can mean the difference between paying debt with my own money or with supplier money. My inventory management relies heavily on turnover ratio and is critical to the same spread in A/R versus A/P. Turning inventory within the period of credit decreases my own cash investment and allows me to make money off the supplier cash. Capital assets provide deprecation and long-term quantifiable value to a company. Machinery, equipment, and property can also be used as collateral for business funding - too bad banks don't lend on goodwill. Goodwill is a difficult term to define and even more difficult to value. In purchasing a business, I try to discover the actual costs/values of the assets I mentioned above and then try to negotiate the amount of goodwill the owner is asking for. The best approach is to ask for "proof" along the lines of foot traffic, average ticket count, and other measures that may paint a better picture of future value. On the sell side, I try to build the best case for the max amount of goodwill I can get. In recent years due to the lax credit standards and increase in home equity, I have been able to sell (flip) businesses for 100% to 200% gain in a very short time. Insane. I can attest to that being purely "goodwill."