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People get assets and resources mixed up. Business managers, politicians, customers, and academics tend to use the terms interchangeably. But there is a fundamental difference of meaning between them. There is a lack of critical thinking when it comes to assets and resources, both in understanding the differences, and how to best define these two important components of business.
Let me propose a set of definitions for our study here.
Resources are a much broader category, but we can specifically differentiate resources from assets. Resources are the non-material services that a company spends cash money or time to obtain, to create products and services. You can create specifications for a resource. You can design how you use a resource. Resources have market values. There is an expense to finding, using, and maintaining a resource. But resources do not have a material value, and they cannot be sold for scrap at the end of their useful life, because a resource does not have useful life.
There is a difference between spending and investing.
Verb: To pay out (money) in buying or hiring goods or services. Noun: An amount of money paid for a particular purpose or over a particular period of time.
Verb: To put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.
We invest in assets, we spend on resources.
An asset is a tangible item that offers a profitable return, creating interest, income, or value appreciation. Companies invest in inventory to convert into goods, or to resell at a profit. Companies invest in equipment or systems to help convert the assets into revenue. Companies invest in real estate to help house the operations that convert assets into revenue, and for the appreciation of the real estate.
A resource is a service or product, something consumed in the process of converting the asset into revenue. Machine assets use electrical power resources. Transport assets consume fuel and oil to move inventory assets to market to create revenue. Labor resources operate the machine assets to convert the inventory assets into revenue.
The definitions of resources and assets presented here are a departure from the classical economic definition, by design. Look at the Wikipedia definition of resource, under the heading, Economic Resources. It says, “In economics, a resource is defined as a commodity, service, or other asset used to produce goods and services that meet human needs and wants.”
Interesting. Can assets be resources? A natural resource is a thing. A tree is a thing. So is iron ore. So is water. All can be resources, and all can be assets.
Flip the logic; can a resource be an asset? Can a person be an asset? Can air become an asset? Can your thoughts become assets?
The difference can become abstract when you define the two concepts broadly. Is a brand a resource or an asset? Is the design of a service an asset? In accounting and business, brands get assigned a value and show up on the balance sheet as goodwill. Patented designs can become an asset called intellectual capital on the balance sheet. Unless we sharply curtail the abstract nature of how our society defines an asset or a resource, we start to chase the idea of ownership like quicksilver on a table.
I adore intrinsic simplicity. The current drive to expand the abstraction of what is a resource and what is an asset leads to complexity and confusion. That confusion leads to legal battles over who invented what product, what action, what service.
The war between Apple and Samsung is an example of the tremendous waste of capital to defend an abstract asset. What real value does Apple get from this effort? Does this legal effort actually turn into revenue for Apple? Under accounting rules, the fines and penalty collected is not an operating revenue. The question becomes, does defending the patented ideas actually increase Apple’s operating income? Will Apple sell more iPhones because of the patent?
We will never know for sure. I doubt that the money spent on legal fees will increase Apple’s revenue.
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