Tangible assets form a crucial part of maintaining your business's financial health. They are part of calculating the net worth as well as maintaining the balance sheet. This is why we've compiled this short guide to tangible (and intangible) assets and how to calculate them.
Tangible assets - explained
Tangible assets refer to any business assets that have a clear monetary value and take a physical form. This could, for example, be a company car, business property, office supplies, factory equipment, or IT equipment. By contrast, intangible assets merely have a theoretical value. This includes eg patents and intellectual property.
Tangible assets are characterized by several things - they are subject to depreciation, retain residual value, are used in a company's daily operations, have a physical form and the company can obtain financing by using assets as collateral.
.jpeg)
Categories of tangible assets
Tangible assets fall under two categories: current and fixed or long-term.
Current assets
- Current assets refer to anything liquid - eg cash, accounts receivable, and securities. While they may not always take a conventional physical form, your company's accounts are still tangible assets.
.jpeg)
Fixed assets
- Fixed assets refer to assets that are not liquid, but have transactional value. This includes physical entities, such as equipment, real estate, office furniture, or vehicles. Fixed assets are subject to depreciation which means they are reducing in value over time. When noting these long-term assets in your balance sheet, you should apply a depreciation formula to account for this loss in value.
.jpeg)
Intangible assets
Intangible assets refer to any assets whose values are more theoretical. This could eg be copyrights, licenses, patents, brand value, and trademarks. Some of the intangible assets' value is itemized, meaning it is set according to eg purchase cost, others (eg brand value) are determined during a company-wide valuation.
Calculating tangible assets
There are several ways to calculate tangible assets, each offering different insights depending on the context. These methods can include approaches like replacement cost, market value, and book value, which provide various ways to assign value to physical assets. However, when it comes to a clear and straightforward calculation, the net tangible assets (NTA) formula is often the simplest method.
Net tangible assets formula
The net tangible assets formula is a simple calculation that subtracts liabilities from the value of your physical assets to give you a clear picture of your business's tangible asset base.
Net tangible assets = Fair market value of tangible assets – Total liabilities
This formula is particularly useful for understanding the true worth of your business’s tangible assets after accounting for any liabilities. It gives you an indication of how much of your business's value is backed by physical assets that could be liquidated or used as collateral.
Example calculation
Let’s break it down with an example:
- Fair market value of tangible assets: £500,000
- Total liabilities: £200,000
To calculate your net tangible assets:
- Net tangible assets = £500,000 – £200,000 = £300,000
This means your business has £300,000 worth of tangible assets after accounting for its liabilities.
Alternative ways to assign value to tangible assets
While net tangible assets is a specific formula-based calculation, there are alternative methods used to assign value to tangible assets. These methods help businesses assess asset value based on market conditions, depreciation, or potential replacement costs. While these aren't "calculations" in the strict sense, they are important for understanding the value of assets in different contexts.
Replacement cost method
The replacement cost method estimates the amount it would cost to replace a tangible asset with an equivalent one at current market prices. This method is useful when considering insurance, upgrades, or when assessing how much it would cost to replace older assets with new ones.
- Why use replacement cost?
- For insurance purposes to ensure assets are adequately covered.
- To plan for future upgrades or asset replacements.
Since there is no fixed formula, this method often requires research into current market prices for similar assets.
Market value
Market value refers to what your tangible asset could realistically sell for in the open market. Unlike the NTA formula, which relies on the asset’s book value, market value reflects the asset’s current value based on factors like condition, demand, and location.
- When to use market value?
- If you're planning to sell the asset.
- In the event of liquidation or sale of your business.
Market value can fluctuate based on market conditions, and while it isn't calculated using a set formula, an appraisal or market research is typically used to determine this value.
Book value
The book value method is a standard accounting measure that reflects the asset’s historical cost minus accumulated depreciation. This method gives an accounting-based value for an asset on the balance sheet.
- Why use book value?
- For accounting and tax purposes.
- To track depreciation for accurate financial reporting.
The book value provides a useful baseline for financial reporting and decision-making within a company.
How depreciation is calculated
Depreciation is the process of allocating the cost of an asset over its useful life. The most common method is straight-line depreciation, where the same amount of depreciation is deducted each year until the asset's value is reduced to its estimated salvage value.
Tools to calculate tangible assets
If you're looking for a quick way to calculate tangible assets, online calculators can be a convenient option. However, keep in mind that these tools may not always provide the most accurate results, as they often rely on basic inputs and assumptions.
1. Net tangible asset calculators
Online net tangible asset calculators can help you quickly calculate the value of your tangible assets by inputting the fair market value of your assets and total liabilities. These calculators are useful for getting a rough estimate, but they may not factor in nuances like asset depreciation or specific business conditions, which can affect the accuracy of the result.
2. Depreciation calculators
Depreciation calculators are another quick tool to help assess the value of assets over time. By entering the purchase price and useful life of an asset, these calculators estimate how much depreciation has occurred. While they’re useful for general estimates, they may not take into account all the factors that can influence depreciation, such as usage, condition, or obsolescence.
3. Futrli
For more accurate and detailed calculations, Futrli offers financial forecasting tools that help you track tangible assets, including depreciation and asset performance. Futrli integrates with your accounting system, providing real-time insights and more precise calculations for managing your assets.
Making tangible asset calculations easier
Calculating tangible assets is just the first step. Consistently tracking these assets over time is crucial for understanding your business's financial health. Regularly monitoring their value helps you make informed decisions on everything from capital allocation to asset replacements and securing financing. By keeping accurate records, you ensure your business remains on track for growth and financial stability.
Ready to take control of your asset management? Start Futrli’s 14-day free trial today and see how our tools can help you track and optimise your tangible assets more effectively.