How To Value Your Asset And Investment

ASSET

DEFINITION
Asset in financial world is divided into two, current and fixed asset. Current assets are easily convertible to cash, and which economic life or value is not more than one financial year; like stocks, debtors and cash. While fixed assets are those, which economic life or value covers more than one financial year; like cars, furniture and fittings, and buildings.

But to the average man, asset is any item of value; such as cars, electronics, gold, jewelleries, shares, and houses. Some of these items are actually asset for investment purposes, but some are not.
In the investment world, an asset is an item which brings in money, and has positive cash flow. Positive cash flow means that, cash in-flow from an item like, dividend, rent, and income, is more than cash out-flow from it, like cost of maintenance, interest, and rent, and this implies that an item with negative cash flow is a liability, even if it’s your house.

VALUATION

Generally people value their asset by its market price, but in the financial world, they are valued based on the historical cost. There is a need for us to understand the basis of these valuations.

Ordinarily Mr Peter would value his house by the market price as advised by a professional, based on some factors and the forces of demand and supply. The forces of demand and supply are the most important factor in any market price, and it is based on emotion and sentiment of people, which is not consistent and reliable. This means that any market price used by Mr Peter as value for his property is not reliable.

If this type of asset was owned by Peter & Co Ltd, it would be valued at its Net Book Value , which is historical cost less accumulated depreciation. Historical cost is the price at which the property was acquired, "let say about twenty years ago", and then less depreciation charged over the years, to give us the Net Book Value.
But for investment purpose, the value of an asset is its net cash flow. Mr Peter and Peter & Co Ltd, should value their asset, based on its net cash flow, which is the excess of cash in-flow over cash out-flow.

MANAGEMENT
As defined earlier, asset is anything that brings cash into your pocket. The main principle of asset management is to increase your net cash flow, and thus increasing its value.

For most people their job is the first asset, “since it brings in money into their pocket” that they really have, and it is the income from this, that they will use to start building up other asset. The best way to manage this type of asset is by acquiring more skills, not necessarily certificate, to be able to solve more problems. And the more or bigger the problems you can solve, the bigger your income.

But you need to be very careful here, and learn how to save for wealth, because not every time that people have increase in salaries that they save, and not all savings leads to wealth, some could leads to poverty, please click here to read an article on savings to wealth.

For the purpose of easy understanding, we shall divide investment asset into two groups, controllable and uncontrollable asset.

Uncontrollable Asset: These are assets which you cannot influence its cash flow like, shares, mutual funds, and debenture. The best way to manage this type of asset is to consider the expected returns before buying it. Some has fixed rate of return like debenture and treasury bills, but shares and mutual fund do not have a fixed rate of return.

Before investing in shares you need to consider the quality of management, three to five years financial statement, and its plan for the future. In considering the financial statement, ensure that they have a strong earning Per share, and tradition of giving regular dividend and bonus shares.

Controllable Asset: These are assets in which you can influence it cash in-flow. Asset management as stated earlier, is all about maximizing your cash in-flow and minimizing your cash out-flow.

The best asset anybody can have is a good business that brings in constant cash flow, focusing on things that brings in cash and not necessarily sales. This is because, not all sales result into cash, likewise not all profit usually results into cash, and this is why so many businesses looks good from their financial record but are still having big problems.

Great sales/profit is important, without increase in sales/profit a business is like an insane man, and business with increase in sales/profit is like a healthy and sane man, but if a business has great increase in sales/profit without adequate cash flow is like a man without blood, a dead man. Cash makes sales/profit real; it is the reality on ground. So try to increase sales and avoid some expenses you can differ, and review your credit policy, to ensure that you have enough cash on ground.