Businesses have assets - or at least, they should. Assetsare anything a business owns. This article explains one type of assets, called current assets. We'll start with business assets and get to current assets shortly.
What Are Business Assets?
Every business has assets, which in their simplest terms are "things of value." Like the actor's smile is her asset, a business needs assets to produce its products or sell its services.
Assets can be tangible, like a piece of equipment or a vehicle, or they can be intangible, like a patent or trademark or copyright.
Business assets are listed on the balance sheet of the business, on the left side. On the right side, the ownership of those assets is explained. Either the owner owns the assets, or they are "owned" by a lender, a bank, or someone else.
What Are the Types of Business Assets?
In terms of the business balance sheet, business assets are categorized by the length of time they are usually held by the business and also by how easily they can be converted to cash.
Cash is the most liquid asset because it already is in a cash form and can be used to make payments easily and quickly. All other assets are listed under cash in the order in which they can be converted to cash. Why is cash so important? Because businesses need it to pay bills and pay employees.
What Are Current Assets?
Current Assetsare thosebusiness assetsthat will be converted into cash within one year, and assetsthat will be used up in the operation of a business within one year. That's the quick definition, for those of you who want the basics. But it's also important to understand the background and importance of current assets to a business.
What Are Current Assets vs. Long-Term Assets?
Knowing the types of assets and how they are categorized helps you to look at the balance sheet of a business and determine its strength.
Current assets, those which can quickly be converted to cash and which are typically held for less than a year, are:
- Cash (for a business, this means the money in the business checking account and any money market accounts)
- Accounts receivable: This term describes amounts owed to the business by customers. It's usually easy to turn receivables into cash.
- Pre-paid insurances. Most insurance is pre-paid, and if the business cancels the policy, it can usually get most of this money back.
- Inventory.It means supplies, parts, and items that can be quickly turned into products to be sold for cash.
Long-term assets, sometimes called capital assets, are more difficult to turn into cash. These assets include equipment, furniture, and fixtures, then land and buildings. Note that land and buildings take the longest to be converted into cash, so they are listed last.
Why Is It Important for Me to Know About Current Assets?
It's important for a business to have assets, and for the business to have some current assets that can quickly be turned into cash if necessary.
How Are Assets Evaluated?
A business is evaluated in several ways based on its assets. Most commonly, those who look at businesses use financial ratios to do these evaluations. Just looking at the numbers isn't as meaningful as looking at the ways the numbers stack up against other numbers.
Two common financial analysis ratios used to evaluate business assets are:
1. Current ratio, which compares current assets to current liabilities. Joshua Kennon, at Investing for Beginners, has a good discussion about current ratio.
2. Quick ratio, which compares only cash and receivables to current liabilities. By leaving out inventory, this ratio is more stringent. It's sometimes called the "acid test" ratio. Rosemary Peavler at Business Finance has a more detailed discussion of quick ratio.
FAQs
Current assets are part of a company's working capital and are essential for day-to-day operations, typically contributing to the business's overall cash flow. They're easily converted to cash to provide liquidity to meet short-term financial obligations while finding other business initiatives.
How do you analyze current assets? ›
To calculate your total current assets, you need to subtract the total of your current liabilities from the total of your current assets. This number represents your business's net value (before taxes and interest) on any given day—also known as its book value or shareholders' equity.
What business tool helps companies effectively make use of current assets? ›
Working capital management is a business process that helps companies make effective use of their current assets and optimize cash flow. It's oriented around ensuring short-term financial obligations and expenses can be met, while also contributing towards longer-term business objectives.
Why are current assets important in business accounting reports? ›
Current assets are the resources that a business owns and expects to use or sell within a year. Current assets are important to a business because by converting them to cash they allow it to pay its day-to-day operating expenses, bills and loan payments - its current liabilities.
What does current assets tell you about a company? ›
Current assets include cash, cash equivalents, accounts receivable, stock inventory, marketable securities, pre-paid liabilities, and other liquid assets. The Current Assets account is important because it demonstrates a company's short-term liquidity and ability to pay its short-term obligations.
For what purpose are current assets held in the business? ›
In other words current assets are those assets which are held by the business with the purpose of converting them into cash within a short period, i.e., one year. For e.g., Debtors, Bill receivables, Stock etc.
How do you analyze asset utilization? ›
The most basic asset utilization metric takes the total losses in hours and subtracts those losses from the total number of hours in a year (8,760). The maximum possible asset utilization for each asset is 8,760 hours in a year period.
What are the 5 methods of financial statement analysis? ›
What are the five methods of financial statement analysis? There are five commonplace approaches to financial statement analysis: horizontal analysis, vertical analysis, ratio analysis, trend analysis and cost-volume profit analysis. Each technique allows the building of a more detailed and nuanced financial profile.
What tool can help to analyze company does best now? ›
SWOT Analysis is a tool that can help you to analyze what your company does best now, and to devise a successful strategy for the future.
What is effective management of current assets? ›
Effective management of current assets involves optimizing inventory levels, monitoring accounts receivable collections, implementing cash flow forecasting, and minimizing idle cash balances.
The asset turnover ratio measures the efficiency of a company's assets in generating revenue or sales. It compares the dollar amount of sales (revenues) to its total assets as an annualized percentage. Thus, to calculate the asset turnover ratio, divide net sales or revenue by the average total assets.
What are current assets examples in business studies? ›
What are some examples of current assets? Some examples of current assets include cash, cash equivalents, short-term investments, accounts receivable, inventory, supplies, and prepaid expenses.
Why do businesses need to manage their net current assets? ›
Managing your working capital more effectively can help improve your business' overall financial health. By managing your working capital effectively, you're helping to make sure that your business maintains adequate cash flow to fund its operations and cover costs for the short term.
Is closing stock a current asset? ›
Is closing stock a current asset? Yes, the closing stock is considered a current asset. It represents the value of inventory that a company holds at the end of an accounting period and is expected to be converted into cash or sold within the next operating cycle or year.
What are the uses of assets in business? ›
Business: Business assets deliver value to a company because they can be used to produce goods, fund operations and drive growth. Assets include physical items such as machinery, property, raw materials and inventory, and intangible items like patents, royalties and other intellectual property.
What is the most important current asset? ›
Cash. Cash is the primary current asset, and it's listed first on the balance sheet because it's the most liquid. It includes domestic and foreign currency, a business checking account that's used to pay expenses and receive payments from customers, and any other cash on hand.
What can net current assets be used for? ›
Net current assets (NCA) is a term used to describe the value of a company's current assets minus its current liabilities. In other words, it's a measure of a company's liquidity and its ability to pay off its short-term debts.
