It is helpful to look at a company’s overall assets and understand how much cash they have on hand or can quickly acquire via financial assets. So is knowing what future value can be generated from its non-financial assets. First, it is helpful to understand the general definitions of financial assets and non-financial assets and their respective categories.
Cash, bank accounts, bonds, and stocks are all financial assets because their value is derived from contractual claims rather than their physical presence. Financial assets are typically more liquid (easier to sell) than non-financial ones. The worth of a financial asset stems from some legal or proprietary claim. It’s like having a piece of paper you can cash in under certain conditions.
Types of Financial Assets
It is possible to categorize financial assets based on the characteristics of their cash flows. Here are some examples of different financial asset types:
Cash and Cash Equivalents
Cash or cash equivalent is a type of financial asset that a company has set aside. These include the current assets that are the most easily converted into cash, cash on hand, the balance in the company’s bank accounts, uncashed client cheques, and commercial paper.
The term “fixed deposit” describes the sum of money an organization puts away with another institution in the hopes of receiving interest payments. An FD account allows you to invest a sizable sum of money at a set interest rate for a specific time frame. It’s a smart way to put away money since you get the lump sum plus interest at the end of the term. A fixed deposit account at a bank might earn you interest at one of several different rates.
The shortest term for a fixed deposit is 7-14 days, and the longest term is ten years. For this reason, an FD is sometimes known as a term deposit. There is no risk of losing money if you open a fixed deposit account at a certain interest rate because that rate will never change, even if the market rate of interest changes. You can choose to receive interest payments at maturity or on a regular schedule.
When a company buys equity shares from another company, the shares become the company’s financial assets. This is an asset for the company that acquired the equity shares, while the issuing company’s owners will gain equity. This financial instrument guarantees the holder a dividend payment from the issuing corporation.
Stocks are long-lived financial assets since there is no predetermined date at which they must be sold. When an individual invests in stocks, they become a partial owner of a company and are therefore entitled to a portion of the company’s earnings and losses. Trading stocks with other traders or holding them forever are the two options for the shareholders. Up to the point that they are sold, the stock is the shareholders’ property.
Value in derivative financial assets is derived from the value of underlying assets. Derivatives are agreements between two parties whose value is derived from some other asset, such as an index, commodity, stock, interest rate, currency, and so on. Options, futures, and swaps are the most widely utilized derivative instruments.
Loan and Receivables
Assets having predictable or fixed payments include loans and receivables. Loans are assets for banks because they sell them to third parties for profit.
The mutual fund is a type of investment vehicle managed by an asset management firm that pools money from several participants and distributes shares of the fund to each investor. Once the mutual fund has collected enough money from its investors, the money is distributed among several securities. Returns are paid to shareholders of mutual funds over time through capital appreciation and dividends/interest.
Tangible property (also known as real assets) such as land, real estate, inventory, commodities, and intangible assets such as intellectual property, patents, copyrights, and trademarks are examples of non-financial assets. The value of a non-financial asset does not come from monetary factors but rather from some other source.
The financial institution you approach for a loan may ask to see evidence of your non-financial assets if you intend to use them as collateral for a secured loan. If you fall behind on your payments, the collateral you’ve put up will be sold to cover the difference.
Therefore, it is important to know the future value that can be obtained from a company’s non-financial assets and how much cash they have on hand or can swiftly acquire via their financial assets when evaluating the company’s overall assets. In my perspective, most organizations would benefit from having both sorts of assets at their disposal. If their financials become skewed in one direction, it could significantly impact their ability to run efficiently.