Real estate, machinery and fixtures are known as fixed assets and should only be considered as offering an unknown support to quick assets. In fact, real estate should be practically ignored unless a direct and steady revenue is derived therefrom. In other words, real estate should be looked upon only as something to fall back upon in case of need and never considered as a basis for a bank loan.
In a manufacturing business both buildings and machinery are constantly being converted into goods, and proper allowance for depreciation should be made each year out of profits.
If the premises are rented they should be suitably located for the business, and the rent paid should be in proportion to the business done. Much depends, however, on the nature of the business itself. A drug or tobacco business could afford to pay a large rental for a corner store because of the quick turnover for cash. The same rent, however, might ruin a more profitable business with a slower turnover.
Where the premises are owned outright the rental test should be applied on a basis of interest and taxes. If the valuation of the owner is higher than the business can stand on a reasonable rental basis, the valuation is either excessive, or the business should be moved elsewhere and the property sold. The owner must acknowledge either overvaluation or poor business judgment, if he continues to do business at a more expensive stand than his business warrants.
The value of the real estate as security is the price for which it can be sold at a forced sale. If the holder of a mortgage has to foreclose, the property, altho seemingly desirable and well situated, depreciates enormously, a result which is intensified if the mortgage is to a bank. Experience shows that a large sum is consumed for overdue interest, legal expenses, commissions and the like; this should be taken into account in estimating the real value of such an asset as a means of paying off indebtedness.