How Can Businesses and Individuals Ensure Proper Asset Valuation?

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Published Date:  10-02-2024   Author:   diksha-shastri
captainbiz how can businesses and individuals ensure proper asset valuation

Whether you’re a business or an individual, knowing the worth of your assets is equally important. Wondering why? Hmm… let’s see. Both individuals and business owners have their worths measured in terms of money. This monetary worth of a person or a business also shows how much they contribute to the development of a nation as a whole. Hence, you can see the importance monetary value holds. However, to know this monetary value of assets, be it individual or business, you need to undergo the process of asset valuation. It is a complex but very integral process. In this blog, we will not only discuss what asset valuation is and how important it is in knowing the true worth of assets for businesses and individuals. But, we will also delve into the discussion of how measures and strategies that business owners and individuals follow to know the true and accurate value of their assets. 

What is the meaning of Asset Valuation?

Asset valuation is a process. Through this particular process, valuers study the various aspects of an asset, or multiple assets, to derive its monetary value. For example, X is an individual and he owns 2 different properties. Now, he wants to know the value of one of the properties to sell it. Here, X can take help from a valuer, do a study of the factors to be included and excluded in that valuation, and then conduct the valuation. Now, in the valuation report, the worth of the property determined is true, and usually even usable as legal proof. Hence, it will help X in selling the property at a profitable market rate. 

Moreover, the process of asset valuation doesn’t need to happen for a single asset at a time. You can choose a group of assets to know the collective value. To continue from the previous example, if X was desirous of knowing his/her net worth, then, they’d have to group all properties, cash flows, and other investments and deduct all the values of liabilities to get an accurate asset valuation. This valuation would be a complete financial assessment of Mr. X. 

Also Read: What Is Valuation?

Importance of valuation in different financial assessments

By now, you’ve understood the meaning of the asset valuation process. However, knowledge of merely the meaning isn’t enough. The process of valuation is useful in many different scenarios and circumstances. It applies equally to individuals and businesses from all sectors. So, ideally, valuation plays an equally important role in different types of financial assessments. Let’s see how: 

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Financial Assessment of Individuals 

High net-worth individuals are sought after. Usually, these individuals are business owners that turn into investors, etc and grow their wealth strategically. Moreover, valuation will make the financial assessment of individuals easy. This can help in making decisions related to the purchase or sale of property, insurance policies, investments, etc. Below are the reasons why strategic and accurate valuation is necessary for the financial assessment of individuals:

Aspect of Life Impact of valuation
Investments Examines the performance of various investments – stocks, business interest, etc and facilitates well informed decision making. 
Succession Matters Facilitates easy estate planning through correct knowledge. Makes the process of choosing and transferring wealth to the successors easy.
Insurance Policy Determines the applicable and effective coverage for insurance plans. 
Collateral Can be used as a collateral for loans in case of emergencies.
Tax Filing and Planning Ensures correct determination of the taxable amount and helps in planning taxes for the near future. 
Retirement Planning Facilitates easy planning of emergency funds for the retirement period. 

Financial Assessment of Businesses

For businesses, valuation plays a very crucial role. Especially when the owners are looking to raise funds or expand their business. Let’s check out the various aspects of business and how accurate valuation can positively impact it.

Aspect of Business Impact of valuation
Investors Attracts potential angel investors, venture capital firms, and other such stakeholders. 
Fund Raising Makes fundraising through equity simple and increases the trust factor.
Mergers and Acquisitions Helps sellers in maximizing their value and buyers in minimizing it. Hence, easing the negotiation process
Legal Compliance Every year, companies need to submit the financial projections to the ROC. Valuation makes the compliance legitimate and ensures no additional penalties are levied. 
ESOPs Determining the ESOP pool is made easier with an accurate financial assessment of the company and the employee performances. 
Exit Investors are interested in profitable exits from companies. Valuation helps in making plans for the exit of investors. 

Also Read: Why is Valuation Important?

Best practices for businesses and individuals in asset valuation

Simply put, asset valuation will show exactly where you and/or your business stand. So, now that we’ve seen why valuation is so important, we should also ensure that best practices are followed for businesses and individuals in asset valuation. 

Strategies for accurate asset valuation in Business

Since the valuation report plays a very significant role in so many aspects of a business, you must get an accurate value of your business. Though the process is complex, there are certain strategies to ensure accurate valuation in business. Here we discuss a few of these strategies in brief: 

Appraisal of physical assets

Appraisal of an asset refers to the process of obtaining its value. Businesses should hire an external appraiser to determine the value of all their physical assets at regular intervals. This makes the overall business valuation easier. Additionally, doing the appraisals regularly will show you which assets hold value and which are becoming obsolete – giving you ample time to decide upon the asset’s fate. 

Stay Trendy

Keeping up with the dynamic trends is not for the weak. So, entrepreneurs need to make active efforts towards studying the market for their industry. Market conditions and industry trends significantly impact the value of an asset. Thus, keep track of all such updates, and take necessary actions as and when required. 

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Financial Plan

Create a model plan for your finances. This will help in budgeting and managing your cash flow, at a short sight. However, when you look at the bigger picture, it will help in determining the expected growth, and position in the industry or market, etc. 

Comparable Analysis

Comparable analysis can happen internally and externally. Depending on the purpose of asset valuation, you may need to do both, or either. External comparison implies a comparative study of your business with similar players in the industry. Whereas, internal analysis means the internal comparison of an asset over the period. The external analysis will show you how your business is doing in comparison to the others and the internal analysis shows the eternal comparison. 

Cost of Asset

Comparison may not be possible for all the assets of your business. For those assets, you can try evaluating the cost of obtaining them with its income generation power. This will help in determining its accurate value. Hence, an important strategy to ensure accurate valuation is the use of multiple approaches, as and when required. 

Hire a Professional 

At a glance, you may think valuation is easy since you know the ins and outs of your business. However, this will lead to your downfall. Even though you’re an owner, you cannot always wear all the hats for your business. So, hire a professional valuer to help you with the complexities involved in the asset valuation process. This is the most common strategy for ensuring accurate valuation by both individuals and businesses. 

Maintain All Documents

Paperwork seems like a lot. But remember, all the information you are utilizing for the valuation must be kept safe. The reason is that you may conduct another valuation in the future and you can use all the previous information for comparative analysis. Moreover, valuation is also sometimes a legal compliance requirement. So, a safety tip to make sure accurate asset valuation is to keep track of all the information, documents and reports of inclusions and exclusions during the valuation. 

Embrace Technology

Last but not the least – use technology to your rescue. You can use the CaptaizBIz Software tool to streamline your entire Valuation Process. The benefit of using software is that it eliminates the risk of using the wrong method, missing out on important details, etc. 

Tips to Individuals for Ensuring precision in financial assessments

In this age of cutthroat competition, maintaining your financial health should be your top priority. It takes a lot to build the wealth and keep it growing. You spend the ripe years of your life working hard, to create your wealth. So, it is ideal to keep track of your finances. You can easily do so by following the following tips and tricks: 

Keep Records

All your assets and liabilities are very important. During your financial assessment, you will need details about it all. So, one important tip to ensuring precision in your assessment is to keep a detailed record of all your assets and liabilities. This includes copies of bank statements, investment details, property deeds, share certificates, etc. 

Account Reconciliation

Reconciling your accounts, credit and debit cards, etc at regular intervals helps in maintaining the accounts. Moreover, it also shows how you maintain your finances. Besides, when you regularly stay updated, you can easily identify all errors and discrepancies. This facilitates well-informed decision-making. 

Understand Finances

To maintain and grow your wealth, first, you’ll have to be aware of the nitty gritty of various financial statements and concepts. Statements like your personal balance sheet, income statement, pay slip, your bank statement, etc. When you know how to interpret the information in these statements, your task of ensuring proper valuation will be halfway done.

Maintain and Monitor your credit statement 

A credit score is a measure of your financial health. It keeps on changing with time and your investment, loans etc. Monitor your credit reports to check their accuracy and reliability. Besides, if you find any discrepancies, you can get them verified and reconciled by the appropriate authority. This is crucial to make informed decisions about future prospective investments. 

Plan a Budget

Create a limitation for all aspects of individual expenses and stick to it. When you create a budget for yourself each month, you clear a path to meet your short-term and long-term goals. Moreover, it allows you to stay at the top of your game. 

Regularly Review Investments

Investing in equity and stocks is a popular source of second income. However, if you keep on making investments without enough research, it may also lead to losses. So, ideally, you should regularly review all the investments you’ve made. As a result, you can exit from the ones that are not generating profits, and invest in other dynamic areas.

Also Read: How Is Valuation Used In Different Contexts?

Additional Best Practices for ensuring accuracy in valuation

Apart from these tips and tricks, certain practices will be beneficial for individuals and businesses alike. So, let’s learn about them in detail. 

Utilizing professional services for accurate valuation

The best way to ensure accuracy in valuation is by taking services from a professional. The process as a whole is as complex as it is crucial. Besides, the valuers in India are usually registered and undergo an examination to ensure their skills are up to the mark. So, here are the reasons why you should utilize professional services for accurate valuation: 

  • Specialization and subject matter expertise;
  • Access to relevant market and industry data;
  • Standard practices and methods for valuation;
  • Ensures accurate due diligence;
  • Provides third-person perspective (unbiased POV);
  • Is compliant with the laws;
  • Prior Experience;
  • Knowledge of the industry’s limitations; and
  • Lastly, can undergo and resolve scrutiny.

Conducting regular reviews and updates in valuation practices

Change is the only constant. Especially in the ever-evolving business landscape. When you are afraid of change or even worse, not aware of the change, you’re paving the way to your downfall. Here’s why conducting regular reviews and updates in valuation practices is important: 

  • Portrays adaptability;
  • Facilitates integration of new data;
  • Ensures compliance with the regulatory amendments;
  • Improves the Methods of Valuation;
  • Makes market comparison easy;
  • Helps in identifying and mitigating risks; and
  • Provides Quality Assurance. 

Compliance and transparency in asset valuation processes

The main purpose of valuation is legal compliance, onboarding investors or facilitating M&A dealings. Hence, the final valuation report should lead to enhanced relationships and understanding between the various stakeholders. Compliance and transparency in asset valuation is important because it allows you to:

  • Stay compliant with the laws;
  • Win the confidence of investors; 
  • Maintain accuracy in financial reports of the company;
  • Mitigate potential risks;
  • Understand the fair market value;
  • Avoid conflicts of interest;
  • Improves communication between parties; and 
  • Facilitates accuracy in overall due diligence. 

Conclusion

In the end, the valuation report will be the foundation for the growth of your financial wealth. This statement in itself doubles the need for valuations to be accurate. These days, you can even use automation tools to ensure complete accuracy in your valuation and financial assessment. Get in touch with us to know more. 

FAQs

  1. Is valuation important for individuals?

Yes, valuation is important for individuals in various aspects. It determines the net worth. Which can later help in succession planning, investment decisions, real estate planning, etc.

  1. Does software give accurate valuation results?

Yes, software with the right technology and information will help you reach an accurate valuation of your finances. CaptainBiz ‘s software is curated specifically to ensure accurate results and streamlined finances. 

  1. How often should I conduct the valuation of my business?

To keep your financial projections accurate, you can conduct valuation at regular intervals. The most common is annual valuation. However, valuation is also very event-specific. 

  1. How can I ensure compliance with regulatory norms in valuation?

The best way to ensure compliance with all the norms is by hiring a professional valuer. With their specialized skill set, it becomes easy to ensure all laws are followed. 

  1. Are valuers important in the valuation process?

Yes, if you want your valuation to be accurate, and error-free, then, valuers play a very important role in the process of valuation. 

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Diksha Shastri

Diksha is a seasoned writer of all things Law, Finance and Business. She aims to make things easy for the readers.

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