What is an Asset?

At its core, an asset is something valuable that an entity owns, benefits from, or has use of in generating income. In the world of accounting and business management, this definition serves as the bedrock for understanding the health of your company.

For a founder, an asset is any resource you can control that creates value. This value might be immediate, like cash in the bank, or it might be future potential, like a patent pending approval.

When you are building a company, you are essentially engaging in the process of accumulating and developing assets. You take capital, which is a liquid asset, and convert it into other forms of value that you hope will generate a return.

One of the most confusing areas for new entrepreneurs is differentiating between what you can touch and what you cannot.

Tangible Assets are physical items.

• Inventory
• Real estate
• Manufacturing equipment
• Computers and office furniture
• Cash

Intangible Assets lack physical substance but are often the most valuable part of a modern startup.

• Intellectual property (patents, copyrights, trademarks)
• Brand reputation
• Customer lists and data
• Proprietary software or code

In the early stages of a tech startup, your balance sheet might not look impressive regarding tangible assets. You might only own a few laptops. However, the code your team creates and the brand trust you build are significant intangible assets.

Are you accurately tracking the value of these non physical resources? It is difficult to place a dollar amount on code that has not yet generated revenue. This leads to questions about how founders should report value to investors before finding product market fit.

To understand assets fully, you must understand their opposite. A liability is what you owe. It is a financial obligation that requires a future sacrifice of assets.

• Loans
• Accounts payable
• Deferred revenues
• Accrued expenses

The fundamental accounting equation states that Assets equal Liabilities plus Equity.

This relationship is vital. If your liabilities exceed your assets, your business is technically insolvent. Founders often focus heavily on burn rate, which is the speed at which you deplete cash assets, but it is equally important to look at the ratio of what you own versus what you owe.

When you look for investment or an exit, the conversation will revolve around your assets.

For a traditional brick and mortar business, valuation often leans heavily on tangible assets. If the business fails, the equipment and real estate can be sold to recover costs.

For high growth startups, valuation is trickier. Investors are betting on the future earning potential of your intangible assets.

• How scalable is the software?
• How sticky is the customer base?
• Is the brand defensible?

This introduces a layer of uncertainty. How do you value a brand that is only a year old? Does your proprietary algorithm have value if the market shifts next month?

Founders must constantly evaluate whether the work they are doing is building a genuine asset or merely keeping the lights on. If an activity does not result in something that the entity owns and benefits from, it may be an expense rather than an asset investment.