Operating assets definition
/What are Operating Assets?
Operating assets are those assets acquired for use in the conduct of the ongoing operations of a business; this means assets that are needed to generate revenue. Examples of operating assets are cash, prepaid expenses, accounts receivable, inventory, and fixed assets. If there are recognized intangible assets, such as technology licenses needed to manufacture goods, these should also be considered operating assets.
Assets not considered to be operating assets are those used for long-term investment purposes, such as marketable securities. Assets no longer used for operations, such as assets held for sale, are also not considered to be operating assets. Further, a non-cash asset that is held for investment purposes, such as an investment property, is not considered an operating asset.
Examples of Operating Assets
The same types of assets are usually classified as operating assets within most businesses. These asset types are as follows:
Cash. The cash asset includes the cash balance in an organization’s checking account and savings account, and may also include a small amount of petty cash that is kept on the premises. The amount of cash held should be sufficient for dealing with the day-to-day needs of the business.
Prepaid expenses. A business may prepay for some items, such as rent, insurance, or advertising, depending on the arrangements with its vendors. These expenditures are classified as prepaid expenses until they are consumed.
Accounts receivable. When a business sells goods or services on credit, it creates accounts receivable, which are the outstanding amounts owed to it by its customers. This is a necessary part of doing business in most industries, depending on standard industry practice. A business might even offer looser credit as a competitive tool, which will increase its outstanding amount of accounts receivable.
Inventory. A business may need to maintain a substantial amount of inventory on its premises in order to manufacture goods, or to ensure that it can fulfill customer orders within a short period of time. Its inventory may be comprised of raw materials, work in process, and finished goods.
Fixed assets. A business likely needs to invest in some fixed assets in order to support its operations. These fixed assets have a long life, and so contribute to the generation of sales over an extended period of time. There are many types of fixed assets, including buildings, land, vehicles, furniture and fixtures, software, computers, and machinery.
Related AccountingTools Courses
The Interpretation of Financial Statements
Importance of Operating Assets
Operating assets are crucial to a business because they are the resources directly involved in generating revenue and supporting day-to-day operations. Their importance lies in their ability to help a company produce goods or services efficiently, maintain smooth operations, and stay competitive in the market.
The effectiveness of operating assets directly impacts a company's productivity and profitability. For example, well-maintained equipment minimizes downtime and maximizes output, while efficient inventory management ensures that products are available to meet customer demand without excessive holding costs. Additionally, intangible operating assets like patents can provide a competitive advantage by protecting unique products or processes from being easily replicated by competitors.
Operating assets also play a significant role in financial reporting and decision-making. They represent a significant portion of a company's balance sheet and affect key financial metrics such as return on assets (ROA) and asset turnover ratio. Effective management and utilization of these assets can enhance a company's financial performance, making it more attractive to investors and lenders.
In summary, operating assets are vital for ensuring that a business can function effectively, grow sustainably, and deliver value to its stakeholders. Proper management of these assets not only supports current operations but also positions a company for long-term success.
How to Analyze Operating Assets
Investors like to compare the amount of total assets recorded by a business to the total amount of operating assets, to see if the business is operating with the correct proportion of operating assets. If not, they may push management to liquidate some non-operating assets and return the funds to investors in the form of a dividend or stock buyback. It is also useful to divide sales by total operating assets and observe on a trend line the ability of management to minimize its asset investment for each dollar of revenue.
A sign of excellent management is a company that can continually generate profitable revenue with the least investment in operating assets. However, this is not an easy interpretation to make, since a company expanding into new lines of business may find that different segments require the use of varying amounts of assets.