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The Illusion that Assets are Assets when in fact, they are Liabilities

The acquisition of assets is a fundamental aspect of running a successful business. Businesses typically acquire such assets with another asset (usually cash). It is also common for businesses to create liabilities, such as loans or alternative forms of financing, to acquire assets. Regardless of the channel, it is universally acknowledged that the primary objective of asset acquisition is to obtain resources with economic value that can provide future benefits to a business. Two important points specific to this conversation are noteworthy. Firstly, an asset is exchanged for an asset, and secondly, a liability is created to acquire an asset. 

With this in mind, the likelihood of an asset becoming a liability must be considered, especially in the context that liabilities, in general and business, are characteristically representative of obligatory burdens. More importantly, a business characterized by more liabilities than assets is a clear indicator of insolvency or bankruptcy.

The illusion that an asset is still an asset when, in fact, it is a liability can have telling negative effects on a business.

4 Signs Signaling Assets are on the move to becoming or have become liabilities

  1. Assets that are not operating at full capacity or have unwanted capacity and cost more than the revenue they generate can become liabilities. In such cases, businesses may incur costs for assets that are not generating revenue, which can negatively impact their financial health.

  2. Similarly, assets that have decreased in value below their acquisition cost and require ongoing maintenance can also become liabilities. Such assets may not generate sufficient returns to justify the expenses incurred, and maintaining them can be costly. These assets can also consume valuable resources that could be better utilized elsewhere in a business.

  3. Another sign that an asset is becoming or likely to become a liability is when it is not supported by a business plan to generate and optimize cash flows. Such assets may not generate the expected returns and may not be aligned with the business's overall strategy. Continuing to own such assets without a plan to optimize their use can harm the business's long-term financial health.

  4. Lastly, assets that add more risk than value can also be classified as liabilities. These types of assets can increase a business's exposure to risk, making it vulnerable to financial losses. Therefore, it is essential for businesses to evaluate the risks associated with any asset acquisition and ensure that the benefits outweigh the risks.

It is important to note that owning assets alone does not create wealth. Businesses must have a sound strategy and the ability to own and optimize assets to succeed. Unfortunately, businesses across sizes and sectors have created assets from assets and have not established mechanisms to ensure optimum use to generate the best return on such assets. More devastating is when liabilities are created in the form of loans to acquire an asset, which, in short order, transition from asset to liability.

Owning assets alone does not create wealth. Businesses must have a sound strategy and the ability to own, retain and optimize assets to succeed.

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