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Current asset management is the handling of the current assets of a company. Any assets that a company or business has that is the equivalent of cash or can be liquidated into cash in the period of a year is considered a current asset. Typically, current assets are the inventory a company has, as well as the accounts receivables and any short-term investments it has in place.
The main principle in current asset management is to keep the proper flow of income and liability in balance. Managing current assets also takes into account the long-term investments of a company, but short-term assets, another name for current assets, is important in determining the liquidity of a company. The measure of liquidity is really the measure of how well and how fast a company can pay off its debts.
Calculating the current ration is key in figuring out 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 specific cycle of time, either a financial year or a cycle of time particular to a business, 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 equal a value of approximately $1.67 USD, meaning that the company has a $1.67 USD to pay off for every dollar they owe. This is typically considered a decent current ratio, although what defines a good ratio will vary from industry to industry. Generally speaking, a ratio of $2 USD in current assets to every $1 USD of liability is considered decent.
A financial planner, or any person responsible for current asset management, works to maintain a balance of the current ratio, also known as the working capital ratio. A balanced ratio means not only the company is in good shape in the short-term, but it also means that the company is more appealing to creditors and investors because the current ratio value is considered a good way to determine a company’s fiscal competence. If the value is too low, it means the company is not a good credit risk as it can’t pay off its debts easily. A current ratio value that is too high could mean the business is not good at managing and investing its current assets.