Current asset management involves balancing a company’s short-term assets, such as inventory and accounts receivable, with its current liabilities. The current ratio, calculated by dividing current assets by current liabilities, is key to determining this balance and a company’s liquidity. A balanced ratio makes a company more attractive to investors and creditors.
Current asset management is the management of a company’s current assets. Any asset that a company or business has that is the equivalent of cash or can be settled in cash in the period of one year is considered a current asset. Typically, current assets are the inventory a business has, as well as accounts receivable and any short-term investments it has.
The main principle in managing current assets is to keep the proper flow of income and liabilities in balance. Current asset management also takes into account a company’s long-term investments, but short-term assets, another name for current assets, are important in determining a company’s liquidity. The measure of liquidity is really the measure of how well and how quickly a company can pay off its debts.
Calculating the current ration is key to determining the proper balance for current asset management. The current ratio is the company’s current assets divided by its current liabilities. Current liabilities are defined as what a business needs to pay off in a specified time cycle, either a financial year or a business-specific time cycle, whichever is longer.
If a company had current assets of $100,000 US Dollars (USD) but the liabilities it had were $60,000 USD, this would equate to a value of approximately $1.67 USD, which means that the company has $1.67 USD to pay for every dollar you owe. This is generally considered a decent mainstream relationship, although what defines a good relationship will vary from industry to industry. Generally speaking, a ratio of $2 in current assets for every $1 in liability is considered decent.
A financial planner, or anyone responsible for current asset management, works to maintain a current ratio balance, also known as the working capital ratio. A balanced index means that not only is the company in good shape in the short term, but it is also more attractive to creditors and investors because the current value of the index is considered a good way to determine a company’s tax competence. If the value is too low, it means that the company is not a good credit risk since it cannot pay its debts easily. A current ratio value that is too high could mean that the business is not good at managing and investing its current assets.
Smart Asset.
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