Companies require assets to generate revenues and run operations. However, not all of those resources may be essential for a company’s activities. Operating assets help run operations and build a company. Therefore, it is crucial to understand what they are.
What are Operating Assets?
Operating assets are the essential tools that companies use daily to conduct their business and generate revenue. These assets, which can include physical items like machinery, buildings, and inventory, are crucial for the company’s core operations. For instance, manufacturing companies rely on machinery and inventory, while retail businesses use inventory and cash for day-to-day transactions.
Critical components of operating assets encompass tangible items like machinery and inventory and intangible elements such as patents and brand value. These assets are crucial in daily business operations, ensuring companies can produce goods or deliver services efficiently. For example, a restaurant’s kitchen equipment and food inventory are fundamental operating assets, contributing directly to its revenue generation.
What are the types of Operating Assets?
Operating assets may fall into many categories based on their usage in a company. Some of the prevalent items included within these are the following.
Property, plant, and equipment
Property, plant, and equipment consist of physical assets like buildings, machinery, and vehicles crucial for production or service delivery. Examples range from a bakery’s ovens to a construction company’s heavy machinery, all playing essential roles in day-to-day operations.
Inventory
Inventory is a crucial operating asset, representing the goods a company holds for sale or the materials used in production. Whether it’s a retail store managing stock for customer purchase or a manufacturer storing raw materials and finished products, effective inventory management is vital for a smooth operational flow.
Accounts receivable
Accounts receivable represent future income for a business. This operating asset comprises amounts owed by customers for delivered goods or services. It reflects the company’s expectation of receiving payment, contributing to its cash flow and overall financial health.
Cash and cash equivalent
Cash and cash equivalents are a company’s liquid assets, including actual cash and easily convertible short-term investments. These assets act as a financial lifeline, supporting daily operational needs and ensuring the company meets immediate financial obligations.
How to calculate Operating Assets?
Companies can calculate operating assets by removing those falling under the non-operating category from total assets. The formula for it is as below.
Operating assets = Total assets – Non-operating assets
Alternatively, the formula for operating assets may include the sum of all items falling within it, as follows.
Operating assets = Accounts receivable + Cash and cash equivalents + Inventory + Property, plant and equipment + Other operating assets
What is the importance of Operating Assets?
Operating assets form the backbone of a business, playing a pivotal role in its daily operations and financial well-being. These assets, including tangible ones like machinery and inventory or intangible assets such as patents and goodwill, directly contribute to revenue generation and operational efficiency. Tangible assets like property, plant, and equipment provide the infrastructure for production, while cash and cash equivalents ensure liquidity for immediate needs.
The effective management of operating assets is critical for maintaining positive cash flow and meeting short-term obligations while also establishing a competitive advantage through intangible assets that differentiate the business in the market. Beyond the immediate operational impact, operating assets influence strategic decision-making, investor confidence, and overall financial health.
Conclusion
Operating assets are resources that companies use as a part of their operations. These can be long-term, for example, property, plant, and equipment, or short-term like inventory or cash. Companies can calculate operating assets using different methods. These assets are crucial in helping companies generate revenues and continue operations.
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