How to Calculate Total Current Assets

The current assets formula, sometimes called the total current assets formula, is a key indicator of the business's short-term financial health. Your goal ought to be for your current assets to exceed short-term liabilities. That indicates you have enough assets to pay off short-term business debts.

Types of Current Assets

Current assets appear on a company's balance sheet, among the required fiscal reports that must be completed every year. Without having a financial background, it can be difficult to determine the meaning of each line on the balance sheet's current assets portion.

It's a good idea to use an accountant or bookkeeper. However when reviewing yourself, anything easily turned into cash within twelve months or less adopts the present assets category. These include cash, cash equivalents, inventory, accounts receivable, marketable securities, and prepaid expenses.

Cash and funds Equivalents

Cash and cash equivalents include money in your company bank account, payments you've received and haven't deposited yet, and petty cash.

Accounts Receivables

Accounts receivables are payments customers owe you for goods or services you've provided. Many small businesses, especially B2B businesses, bill customers and do not require immediate payment. In most cases, invoices are net 30, 60, or 3 months. Accounts receivables are classified as current assets because the payment comes in as cash or can be transformed into cash as with a check.

Inventory

Inventory is your unsold goods open to replenish stock. It's a current asset because within one year, the company will either sell the inventory to customers or can liquidate. Individuals with perishable inventory should be careful to not overstock.

There can be separate line item around the balance sheet for supplies – recycleables or other items which you need for production or business operations.

Marketable Securities

Marketable securities are a liquid asset, meaning they can easily be converted to cash. They include holdings such as stocks, bonds, along with other securities which are traded daily.

Prepaid Expenses

Any expense that's paid prior to actually finding the benefit of the payment is considered a prepaid expense for accounting purposes. Prepaid expenses are documented on balance sheet like a current asset, and then recognized as an expense when it's incurred.

Why is it vital that you understand your current business assets?

Knowing your present assets will help you understand your operating expenses better. This report can help you determine the money open to your company.

Formulas based on the total current assets you have to know

Current Ratio = Current Assets ÷ Current Liabilities

This lets you know the percentage of your firm's debts that you could pay off with liquid assets. Calculating the present ratio also allows for easy comparison with time.

Quick Ratio = (Current Assets – Inventory + Prepaid Expenses) ÷ Current Liabilities

The quick ratio is similar to the current ratio, but only considers the most liquid assets. So inventory and prepaid expenses are excluded.

Net Working Capital = Current Assets – Current Liabilities

The net capital formula tells you whether you have enough assets available to pay off all bills and debts due within twelve months. For those who have a positive quantity of net working capital, that means you've excess cash that you can use towards day-to-day expenses.

Average Current Assets = (Aggregate Assets for Current Year + Aggregate Assets for Preceding Year) ÷ 2

This formula for average current assets gives business people a concept of the typical assets they have on hand throughout a typical one-year period. This can help you plan for upcoming goals.

What's a great current ratio for a small business?

And ideally, you need to strive for a present ratio of just one.2 to two.0. A ratio less than one means you don't have enough assets to cover your liabilities. A ratio more than two means you will possibly not be investing money in opportunities that can generate additional revenue.

How to increase your present assets

If your current assets calculations reveal that you're approaching short, you are able to change this dynamic number. They are some things you can do to improve your situation.

Fast receivables collection

Accounts receivables is a vital portion of your present assets. You need to strive to have invoices paid promptly – you don't want too many of overdue customers. For details about establishing effective invoicing, review this short article:

  • E-Invoicing – Why Your Small Business Needs It

Borrow Cautiously

Work with your accountant and take a look at strategic business plan to find out just how much you should borrow and do not review that quantity. Be sure you have the cash flow to create full payments on time for the life of the borrowed funds. Keep your credit ratings strong so that you can entitled to the lowest cost capital using the longest terms.

Liquidate Unused Assets

Is there unused equipment that's hanging out your shop? That even mean simple things like a pc or copier. If you're not using a part of your office, you can sub lease the area for added cash. If you follow this path, you'll improve your current assets.

Invest Wisely

When investing, shoot for a balance of high-risk, high return investments and safe, low return investments. This increases your current assets and improves your cash position.