Finance. A simple yet complex word.
Every individual, partnership, company, undertaking, NGO, or NPO requires dealing with finances in one manner or another. Let us see the current asset management definition:
What is Current Asset Management?
Current asset management is the process of administration of current company assets that are the equivalent of cash or can be liquidated into cash in the period of a year. The purpose of current asset management is to keep the flow of a company’s income and liability in balance.
When we use the term current asset, we simply are referring to the inventory of the company. Simply put, business assets that could be liquidated in less than a year are the ones known as the current assets of the company.
And when we manage these current assets to balance an organization’s efficient working, the process is termed as current asset management. There are several inclusions of the current assets, such as inventory, short term investments, accounts or bills receivable, etc. Another major component of the current asset is cash itself. Anything (assets) that can be quickly converted into cash within a year is under the category of current assets.
When we study and apply current asset management to any given business situation, the main intent is to ensure a smooth flow of incomes while balancing the liabilities at a stretch. When we have to manage the given organization’s current assets, one may consider the long-term investment. Still, for determining the liquidity quotient, we will consider short term investments much prominently. When we say that an organization has effective liquidity measures or means, the company can pay off its debts pretty fast, usually within a year!
Next, when we talk about the accounting part of the current asset management, there exists a super crucial ratio, namely the Current Ratio.
Current Ratio = Current Assets/ Current Liabilities.
For example, a company had current assets of $200,000 US Dollars (USD). Company liabilities were $130,000.
The Current Ratio is $200 000/$130 000, and this is $1.54, meaning that the company has $1.54 to pay off for every dollar that the company owes.
These terms are essential to understand as they lay a rock-solid foundation of current asset management. An article by finance management has described the benefit of the current ratio in accounting systems.
The ideal current ratio is said to be 2:1.
This means that for a ratio of every $2 worth in current assets, $1 of current liabilities would be considered decent and manageable.
Trying to explain this with an example, if an organization has current assets worth $50,000, whereas the current liabilities are worth $25,000, then the current ratio would be 2:1. Current Ratio : $50,000/$25,000 = 2:1 (Ideal Current Ratio).
This ratio can vary from industry to industry, but on a general level, 2:1 is considered to be a value proportion. It simply means that one should ideally have double the currents assets than they have their current liabilities to ensure a smooth flow of work, income, and a balanced set of liabilities.
Usually, the accounts team handles the current asset management in the majority of the organization. CA, CFA, finance executive, or a financial planner is responsible for dealing with current asset management. This is done with the intent to maintain a sustainable working capital ratio. Also, a balanced ratio of the scorecard can be used as an advantage in front of the investors. It would make the company look more appealing and at a good financial and fiscal positioning.
So, this was our take on current asset management! Finance is a beautiful and essential pillar of any organization. None of us can run away from finance; therefore, it is necessary to understand this from the core, utilize its application, and gain maximum results from our effort. Regarding our article, use this concept for your business or personal finances and get the maximum out of your income!