A current asset is any item of value within your business that can be converted into cash or used within one financial year. Typically liquid, current assets can include physical cash, stock and supplies.
Understanding current assets
Current assets are vital because they provide quick or instant access to cash, allowing a business to meet short-term financial obligations and maintain operations.
“Knowing your current cash position, and your future cash position months in advance, is important to help predict your ability to pay back big outgoings such as VAT, rent and payroll,” says Marc Summers, Founder of London-based restaurant Bubala.
Types of current assets
Cash and cash equivalents
Assets that are already in monetary form or which can easily be converted into cash are known as cash and cash equivalents.
“These are assets that are easily turned into liquid funds, such as balances in a business’s current bank account, petty cash or stock items that are easily sold in exchange for cash,” says Bernard Ho, Accountant and Small Business Adviser.
Accounts receivable
Accounts receivable are monies owed by clients and customers. This term generally refers to purchases made on credit for goods or services where payment is required within a fixed period.
Accounts receivable are important as they allow businesses to predict their liquidity and manage short-term obligations without accruing debt or using additional cash flows.
“By monitoring account receivables," says Ho, "a business can keep a handle on collecting monies owed. Maintaining a good stock level means there are goods available to sell while not overstocking and owing suppliers.”
Summers adds that creating a cash flow forecast and updating it weekly can help ensure you are as close to the real picture as possible.
“Every Monday morning, I have a look at the forecast and update it with actual figures from the week before,” he says. “Knowing my cash levels enables me to make decisions confidently and limits my risk when making key business decisions.”
Inventory
This describes any stock or goods in hand that are ready to be purchased or services ready to deliver. Common examples of inventory can include raw materials and stock.
Prepaid expenses and short-term investments
Other examples of current assets include prepaid expenses, which can include things like rent for premises or office space, and business insurance. These are considered current assets because they may represent a future financial benefit to the company.
Short-term investments, which are sometimes referred to as ‘marketable securities’ include bonds or savings accounts and also count towards current assets as these can be converted into cash relatively quickly.
“We put [these types of current assets] on our American Express® Business Gold Card, such as our rent,” says Tom Welbourne, Founder and Director of The Good Marketer, a digital marketing agency that works with businesses across the UK and globally. “We do it so we can collect the points and also get the benefits of having extra time to pay to help improve cash flow¹."
The more a business uses an Amex® Business Gold Card, the more Membership Rewards® points they will accrue. Points can be redeemed with hundreds of online suppliers across retail, travel and dining, or converted back into a statement credit to reinvest in the business².
Current assets on the balance sheet
A balance sheet will feature assets, liabilities, and the business owner's equity. Current assets are recorded on the balance sheet in the assets section and usually appear at the top and in the order in which they can be quickly converted into cash. Generally, this is cash and cash equivalents, short-term investments, accounts receivable and inventory. However, this can differ depending on the type of business.
Current assets vs. liabilities
Liabilities are what a business owes to others and is expected to settle within a year. In essence, if current assets are indicative of future financial health, then its liabilities represent its future obligations.
Why are current assets important?
Your current assets will help you effectively manage risk and ensure you make the right strategic decisions to maintain business growth.
Working capital management
Your current assets contribute significantly to your working capital, the money your business needs to maintain its day-to-day operation. It’s the difference between your assets and your liabilities.
“Current assets provide available cash to enable a business to regulate its cash flow,” says Ho.
Liquidity
Liquidity refers to how easily an asset can be converted into cash without affecting its market price, and is perhaps the biggest attraction for holding current assets. It is a good reason for a business to target efficient stock inventory management, says Summers.
“Keeping your holding stock purchasing levels under control enables you to have additional liquidity,” he says. “Setting comfortable holding stock levels for your managers so they are aware of their target will allow your company to retain much-needed cash for expenses.”
Risk management
“You may be a profitable business but if you don't understand your cash flow, you may be unable to make payments and put your business at risk,” says Summers.
Working with suppliers to ensure you have credit terms that allow you to fully manage your cash situation is important. For example, following COVID-19, managing Bubala cash flow was extremely difficult due to misaligned payment terms between the restaurant and its suppliers. The restaurant agreed a change in its payment frequency with suppliers which made its cash flow more predictable.
To effectively manage risk, Ho says businesses need to chase accounts receivables, set credit terms and be wary of having too much stock and inventories at once.
Current assets vs. non-current assets
Non-current assets represent a company’s longer-term investments, those elements where a business does not expect to gain value from within the year but which help generate income. They can include premises, equipment, furniture, vehicles, patents and trademarks. Businesses can keep non-current assets for a long time, to increase their value.
1. The maximum payment period on purchases is 54 calendar days and is obtained only if you spend on the first day of the new statement period and repay the balance in full on the due date. If you'd prefer a Card with no annual fee, rewards or other features, an alternative option is available – the Business Basic Card.
2. Membership Rewards points are earned on every full and eligible £1 spent and charged, per transaction. Terms and conditions apply.