As entrepreneurs, we’re always trying to figure out what to treat as anasset, and what to treat as a liability.
For instance, When you’re trying to figure out if you can afford to hire afreelance copywriter to help you build an ebook that can eventually generatemultiple six figures annually for you, for example, it’s best to think of yourself as an asset.
But when you’re considering how much you can spend on a digital marketingagency to help you promote your ebook, or an affiliate manager to help you sellproducts, it’s important to treat your business as a liability.
What is the difference between Assets & Liabilities?
Asset value comes from the things you own that give you an advantage overothers. Liability comes from things you own that limit your options. Aliability might be something like a car loan. It may put you in a position where you have to be late for work every day, but it doesn’t make you rich or get you to any sort of high. That's when insurance comes into play. Not taking it into detail
An asset, on the other hand, like your education or your skills, issomething that gives you an advantage over others. An asset might be a home youbought with cash or a sports car. It’s something that makes you unique and different from other people. So, the thing you have to remember when thinking about your liabilities is that they’re liabilities because they limit your options. When you have an asset, it’s something that gives you advantages.
How to Minimize Liabilities for Your Financial Plan?
is a critical part of operating a business. If somethinggoes wrong, who will pay for it? While businesses may have insurance coveragefor liability, it’s not always enough. If someone gets injured at your facility, it could cost you hundreds or even thousands of dollars to fix the problem.
If the product you sell causes damage to the customer’s property, you couldbe on the hook for replacing the item or repairing the damage. And if somethinghappens to your business’s reputation, you’re likely looking at some serious negative press.
What Are Some Important Rules for Debt Management?
The rules of
debt management are easy to understand: If you have to pay back a loan,you don’t spend money on anything else. You keep working until you pay back themoney, plus interest. Here are the four most important rules of debt management:
- You don’t borrow money to pay for other expenses.
- You never put yourself in a situation where you owe more than you earn.
- Never let yourself accumulate more debt than you have the means to repay.
- The more you owe, the less you can spend on living expenses.
In conclusion,
the question of whether an item is an asset or liability comes down to howyou define your costs and revenues. For example, the costs to create a productinclude manufacturing, tooling, materials, inventory storage, and distribution costs.
When you sell the product, you deduct the sales price from revenue. Thisleaves you with the net income. If you have a high-cost product that is veryhard to replicate, then your net income will be low and you will treat the product as a liability.
In contrast, if your product is low-cost or you can replicate it, then youwill be better off treating the product as an asset.
