The modern business world is always changing. Markets shift, competitors come and go, and unexpected opportunities slip away almost as quickly as they pop up.
The key to surviving and growing in such a volatile landscape is financial agility, which means having the cash to adapt your strategy, no matter what comes your way. This often hinges on the strength of your current assets — the resources that fuel daily operations and drive profitability.
What’s a current asset?
A current asset is any asset you expect to be sold, consumed, or converted into cash through standard business operations within one fiscal year or operating cycle. Examples include finished goods, raw materials, and production supplies.
These assets are essential for day-to-day operations because they provide the liquidity needed to manage expenses and debts. For example, you know to expect revenue from the goods you sell, and you may use that revenue to reinvest in the business or pay bills. Properly managing current assets helps your company meet its short-term obligations and accept opportunities for growth.
Current assets versus non-current assets
While current assets are those you expect to liquidate within a year, non-current assets, also known as long-term assets, are those you intend to use for several years before liquidation. These include fixed assets like property and equipment.
The difference all comes down to an asset’s liquidity and its role in the company’s financial strategy. Current assets provide immediate cash to fund ongoing operational expenses. Non-current assets are the opposite — they won’t be liquidated within the fiscal year but instead support long-term goals and investments.
Current assets versus current liabilities
Current liabilities are the debts or other obligations you need to pay within a year. If something isn’t due within the fiscal year, like bonds payable, loans, and deferred tax liabilities, it’s known as a non-current liability.
Current assets often pay off current liabilities, so you need enough liquidity within your assets to cover those debts — also known as working capital. This figure is a key indicator of a company’s short-term ability to cover its immediate financial obligations. A healthy working capital balance is essential for maintaining smooth operations, meeting payroll, and taking advantage of growth opportunities. It also shows investors and stakeholders that your company has a strong asset base and a manageable level of liabilities.
5 types of current assets
Here’s a guide to five types of current assets, plus examples.
1. Accounts receivable
When customers purchase goods or services on credit, the money they owe is known as accounts receivable. These receivables are considered current assets if the credit period is less than one year because they’re expected to be converted into cash within the business’s operating cycle.
Effectively managing accounts receivable maintains a healthy cash flow and ensures you have enough liquidity to meet short-term obligations. While collecting the money you’re owed requires customers to do their part, you can incentivize timely payments by implementing strict credit policies or offering discounts to those who pay early.
Examples of accounts receivable
- Invoices for services rendered
- Credit sales to customers
- Subscriptions or memberships for your products or services
- Wholesale transactions
- Unpaid fees for services rendered
2. Cash and cash equivalents
Cash and cash equivalents are the most liquid assets. They are typically reported on your balance sheet as the first current asset.
This type of asset is readily convertible into a known amount of cash, which makes it easier to plan ahead and meet short-term financial obligations. Maintaining an optimal level of cash and cash equivalents lets you respond to unexpected expenses or opportunities without taking the time to convert less liquid assets.
Examples of cash and cash equivalents
- Cash on hand
- Money market accounts
- Bank accounts, commercial paper, and treasury bills with a maturity of three months or less
- Short-term investments like money market funds, certificates of deposit (CDs), and marketable securities with a maturity of less than one year
3. Prepaid expenses
When your business pays for goods and services before receiving them, those payments are known as prepaid expenses.
While these expenses can’t be liquidated into cash, they’re still classified as current assets until you pay them. Having a good handle on prepaid expenses leads to better budgeting and financial planning, protecting your business from cash flow issues.
Examples of prepaid expenses
- Insurance premiums
- Rent for commercial space
- Prepaid subscriptions for products or services
- Advertising expenses
- Maintenance contracts
- Upfront payments to contractors
4. Marketable securities
Marketable securities are liquid financial instruments that you can quickly convert into cash at a reasonable price, including stocks, bonds, and other investments actively traded on public exchanges.
Marketable securities let you quickly adjust your portfolio in response to market conditions. Holding these securities also offers a way to earn returns on idle cash while maintaining liquidity.
Examples of marketable securities
- Stocks held for short-term trading
- Bonds with a maturity of less than one year
- Mutual funds
- Exchange-traded funds (ETFs)
- Commercial paper with a maturity of less than one year
5. Stock and inventory
“Inventory” and “stock” are often used interchangeably, but they’re not quite the same thing.
Inventory encompasses all goods a company holds for sale production, including raw materials, work-in-progress (WIP) items, and finished goods. Stock only refers to finished goods that are ready for immediate sale to customers.
While all stock is inventory, not all inventory is stock. Ideally, you sell stock within a year of production to prevent overstocking and expiration. The items you expect to sell within the fiscal year are considered current assets.
Inventory is generally considered one of a company’s largest current assets since it’s converted into cash once sold. Effectively managing inventory is beneficial to both operational and financial health.
Examples of inventory
- Raw materials
- WIP goods
- Finished goods ready for sale (stock)
- Merchandise for resale
- Supplies used in production
- Dunnage
How to calculate current assets
To calculate your current assets, combine your cash on hand with all the assets you expect to liquidate within the fiscal year. Here’s the formula:
Cash + cash equivalents + inventory + accounts receivable + marketable securities + prepaid expenses + other liquid assets = current assets
Accurately track and record each component of your current assets to ensure your company’s balance sheet reflects its true financial position. Regularly updating this calculation helps maintain a clear and correct picture of the company’s liquidity.
Take control of your assets with Fishbowl
Current asset management is essential to any business’s financial health. Fishbowl’s comprehensive asset tracking solutions make it easier to monitor and manage current assets effectively.
By integrating Fishbowl with QuickBooks, you can manage inventory to optimize stock levels and reduce holding costs, track accounts receivable to ensure timely payments, and monitor cash equivalents to maintain liquidity.
Plus, Fishbowl’s robust inventory management solution integrates seamlessly with your existing processes, providing real-time insights into your assets. If you’re ready to take control and gain end-to-end visibility over your operations, schedule a demo today.