What you should know about machinery asset finance

Running a business a notoriously difficult endeavour. We have to basically create a functioning entity that can run itself, successfully delivering on services or products, able to make monthly targets and quotas, pay staff on time and so on. Even smaller businesses have a lot to focus on, because we’re dealing with interests across a range of categories. Larger corporations that have expanded into foreign countries – whether in terms of opening stores or merely selling online to many different countries –  have far more to deal with. However, regardless of a business’ size the unifying concern for every one has to do with finance. If we can find ways to make our finances easier to manage, while still reaping in rewards for the business, then we must do so.

To that extent, it is worth considering the importance and impact of machinery asset finance as a way to help in precisely this way. Ideally, we can then facilitate business progress and make headway in becoming a more lucrative and profitable company.   

Defining the terms

Of course, it’s important to begin by asking what an asset actually is and then to ask: is machinery an asset? As Small Business Chronicle summarises:

“Assets keep a business afloat. They can be sold during lean times, used as collateral during expansion and help produce a healthy balance sheet. Business assets range from cash on hand, to buildings, to patents and logos.”

These assets come in three categories.

First, “tangible assets”, which means everything from buildings to office equipment. Such assets are not consumed, rather they are maintained. That doesn’t mean they don’t depreciate – i.e. lose value – but that is not the same as being consumed. Related to this is “capital asset”, which Investopedia defines as “significant pieces of property such as homes, cars, investment properties, stocks, bonds, and even collectibles or art. For businesses, a capital asset is a type of asset with a useful life longer than a year, that is not intended for sale in the regular course of the business’s operation.”

Second, “intangible assets” are those which can’t be touched. As the Business Dictionary defines it: “Reputation, name recognition, and intellectual property such as knowledge and know how. Intangible assets are the long-term resources of an entity.”

Finally, we also have “intellectual property”. These include: logos, trademarks, patents, brand names, inventions and so on. This category is a variation on what constitutes an intangible asset. Though it is part of “intangible assets”, it’s notable for differing from other such assets, according to SPH Value, “in that it is the result of conscious creative activity.”

Assets themselves are then further defined. For example, a current asset is another aspect to considers. As Accounting Coach defines it:

“A current asset is cash and any other company asset that will be turning to cash within one year from the date shown in the heading of the company’s balance sheet. (If a company has an operating cycle that is longer than one year, an asset that will turn to cash within the length of its operating cycle is considered to be a current asset.)”

What about machinery?

Every business requires technology to work, whether through computers or larger production tools. This is what we consider machinery. It is used to help conduct business and is not stock, premises or even part of the business premises. This isn’t to say such tangible assets aren’t essential, only that we must be strict about our definitions.

This is why it’s reasonable to ask, is machinery considered a current asset? Considering machinery will be used long term to actually conduct business, we can presume the answer is no. Machinery is there long term for as long as the business continues to operate. Ideally, if it’s helping us fill quotas, make profits and so on, the machinery isn’t being kept so that it can be turned into cash within a financial year.

We can then ask: is machinery a capital asset? The answer is yes. It is still property of the business, but it is not being sold within the year but held long term. This is the exact definition of capital asset, as we defined it above.   

Once we understand the importance of these terms we have greater clarity on what it means to operate a business. These are various tools we can and do use, but not knowing how they fit into a business structure means miscalculating business decisions. This isn’t merely to help our accountants, but also gain insight ourselves. All of this knowledge, of course, is aimed to improve and enhance the business. Armed with this knowledge, we can hopefully make better, more lucrative decisions about our businesses in future.