Assets & Liabilities: What Does An IT Manager Need To Know?

by drjim on August 30, 2012

Image CreditUnderstanding what assets and liabilities are is the key to knowing how the company is doing

Understanding what assets and liabilities are is the key to knowing how the company is doing

As an IT manager, you have a responsibility to your team to be able to keep them informed on the economic health of the company. Every company goes through periods of up and down, boom and bust, economic results. Your responsibility is to be able to understand what the company’s current financial situation is no matter what the current management is or is not saying and to be able to show some leadership and be able to clearly explain it to your IT team. This means that you’re going to have to have a good understanding of just exactly what assets and liabilities are.

What Are Assets?

Your company’s financial statement starts with a listing of its assets. Remember that assets are things that the company invests in so that it can make money. On the financial statement, the assets that can be most easily converted into cash will be listed first. This will include such things as cash on hand, marketable securities, receivables, and inventory. Grouped together, these are called “current assets”.

A good way to think about current assets is to view them as being assets that can be converted into cash within one year.

The next items listed under assets on the company’s financial statement are what are called the “fixed assets”. These are assets that would be tougher to convert into cash. This can include such things as buildings and equipment.

One final note on fixed assets. As a general rule, these types of assets depreciate over time (become less valuable because of wear and tear) and so the company will keep track of how much their value has been decreased by a term called “accumulated depreciation”.

What Are Liabilities?

The other side of the coin when you are talking about assets are liabilities. Liabilities are money that is owed to creditors. The claims of creditors that typically must be repaid within a year are called “current liabilities”.

If you subtract the company’s current liabilities from its current assets you end up with what is called the company’s “net working capital”. This is how much money the company has tied up in its short-term operating activities.

Every company also has what are called “long-term liabilities”. These include such things as bonds and mortgages. If you subtract the company’s total liabilities from the company’s total assets you end up with the owner’s equity. This is also referred to as being the “retained earnings”.

What Does All Of This Mean To You?

IT managers have a responsibility to be able to explain the current state of the company to their IT teams. This means that IT managers who want to be able to understand their company’s financial statements need to start with an understanding of what assets and liabilities are.

Assets are things that the company invests in so that it can make money. On a financial statement assets are listed in the order in which they can be converted into money. Liabilities are money that is owed to creditors. On a financial statement liabilities are listed in terms of both short term current liabilities and long term liabilities.

No, an IT manager does not have to become an accountant in order to understand the company’s financial statements. However, a knowledge of some of the basic terms is required so that you’ll be able to ensure that your IT dream team knows what’s going on with the company.

– Dr. Jim Anderson
Blue Elephant Consulting –
Your Source For Real World IT Management Skills™

Question For You: What will have a greater impact on your IT team: the amount of short term liabilities or the amount of long term liabilities that your company has?

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What We’ll Be Talking About Next Time

Every IT manager knows that analytics is all the rage in almost every company now and has almost become a part of the definition of information technology. Your management has been reading those magazine articles that say now that databases have grown large enough to hold virtually every piece of data that the company collects and servers have become cheap enough to throw at any number crunching problem that the IT department might have. However, what seems to have been forgotten in the IT sector’s current “analytics madness” is that if a manager doesn’t know what they are looking for, then they won’t know what to do with what they get…

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