What Are Current Assets: Definition, Examples, and Importance

Veteran business owners often say that running a business just means putting down fires as quickly as they come up – and most of these fires have to do with money.

If you’re a business, you must have a deep wallet of easily accessible and moveable resources. Not just for putting out financial fires, but also for immediate opportunities, short-term needs, and regular business valuation.

That wallet is a financial category called current assets.

This article will demystify this financial category, and discuss how your e-commerce business can unlock its immediate potential.

Understanding the Balance Sheet: Current Assets as a Financial Category

Current assets are a financial category under your company’s balance sheet – they are assets that your business owns, and which you can convert into cash value within a year.

These assets often are (but are not limited to) categories like the following:

• Cash;
• Inventory;
• Accounts receivable.

Those are the basic categories, but there are many more types of current assets. Current assets are a critical component of your business to learn about. After all, these are the resources readily available to fuel your business’s daily operations.

More specifically, though, current assets are important for a business because it provides a snapshot of how your company will look soon. Knowing how much cash is on hand, how much your inventory is valued, and what receivables are in the pipeline helps make important financial decisions.

Investors looking to pour money into your business or potential creditors will also look into your current assets to evaluate your overall financial health and stability.

Lastly, businesses with just enough current assets are seen as less risky because they have a significant amount of liquid resources to cover a potentially damaging situation. This stability communicates well to investors, shareholders, and creditors.

Differentiating Current Assets from Non-Current Assets

When looking at your company’s balance sheet, current assets are seen near noncurrent assets. Knowing the differences between these classifications is important for your company’s financial health, management, and strategy.

There are three distinct characteristics between the two types of your company’s assets:

• The time horizon of your asset: The company expects current assets to be used up or converted into cash within a year, while your non-current assets have a longer life span, often extending more than a year.
• Nature of use: Your company uses things designated as “current assets” for day-to-day operations. For example, most liquid assets like inventory and accounts receivable go in and out of your company daily — things might get bought and payments received. On the other hand, your company’s non-current assets serve more strategic and long-term purposes.
• How easily it can convert to cash: Current assets are generally more convertible to cash and flexible. Meanwhile, non-current assets require a longer time for conversion, often because these assets are difficult to sell.

For e-commerce businesses, some examples of non-current assets would fall under categories like property and equipment (warehouses and offices), intangible assets (brand logos, intellectual property), and long-term investments (marketable securities from public exchanges).

Examples of Current Assets

Your company’s current assets can fall into many different criteria – indeed, these are very subjective to the company and their business. For example, a sneaker retail e-commerce will have different current asset buckets than a restaurant.

Still, there are some examples of current assets that many companies share, such as the ones we will review below.

Cash and Cash Equivalents

This category is a crucial component. There are two definitions here: cash, and cash equivalents.

Cash includes physical currency and readily available funds in bank accounts. Meanwhile, cash equivalents are highly liquid investments with short maturities, easily convertible to known amounts of cash.

Some examples of items under this category include:

• Cash on hand: Physical currency (for example, Philippine pesos or other foreign currencies your company might hold) which are available for immediate transactions.
• Bank balances: Company money currently held in checking and savings accounts for your business’ liquidity and operational needs.
• Short-term investments: Money market funds, Treasury bills, and short-term debt securities provide liquidity while earning interest.

Knowing these two sub-categories is important because they are the lifeblood of your business operations. These numbers let you pay short-term obligations and seize time-limited opportunities.

Accounts Receivable and Trade Debtors

Some of the universal types of current assets are broadly categorized as amounts that people and other businesses owe.

Money that is still about to come into the business is still considered current assets if they are realized within the year. There are two kinds of this category: accounts receivable and trade debtors.

Accounts receivable are those that your customers haven’t paid yet, for goods or services you delivered to them on credit. On the other hand, trade debtors include both accounts receivable and money owed by trade partners (other businesses or business partners).

One other current asset category that is somewhat related is called Non-trade Receivables, which are amounts owed by entities other than customers, like employees or tax authorities.

These types usually form a substantial part of your short-term assets. Your e-commerce business uses these figures to manage cash flow efficiently. They help you forecast when payments are expected and let you strategize planning and timely investments. 

Inventory and Raw Materials

You’re probably familiar with our beloved sari-sari stores, a Philippine staple. The goods on display are a great example of inventory. There are several kinds of inventory and raw materials, all of which fall under this type of current asset category.

Let’s see them below:

• Finished goods inventory: Ready-to-ship products which are available for sale in the online or physical store.
• Work-in-progress inventory: These are unfinished goods still in various stages of the production process.
• Raw materials: Essential components used in manufacturing products. Examples include fabric for clothes, electronic components for appliances, etc.

Inventory and raw materials are core components of several business types. If you manufacture or sell physical goods, chances are you’re going to have this current asset category.

Inventory includes finished products ready for sale, while raw materials are the components necessary for producing goods. These items contribute directly to your revenue generation.

Prepaid Expenses and Deferred Costs

Another important category that businesses share is prepaid expenses and deferred costs. Prepaid expenses are advanced payments your business made for goods or services you haven’t received yet.

Here are some examples:

• Prepaid rent: This is a payment you made in advance for leasing a physical area like warehouse or office space. For example, your e-commerce business might have already brought a one-year contract to a warehouse and paid in advance.
• Prepaid advertising: Your business might have hired third parties and paid in advance for marketing and promotional activities for the next quarter.
• Purchase of a new plant or facility: A big infrastructure purchase like this is considered a deferred cost because it’s an expensive buy but it provides “economic benefits” over multiple accounting periods.

Deferred costs are short-term obligations you incurred but not yet immediately taken away from your balance. They will be spread over a longer period and recorded as your current assets on the balance sheet for financial reporting.

Knowing these factors gives your business insights into upcoming financial obligations, which will help in budgeting and financial planning.

Current Assets Business Application for Your E-Commerce Business

If there’s anything every business in the Philippines has in common, it’s that they all have some form of asset.

Their categories and actual line items will change from business to business, but whatever they contain, the current assets as a financial category are used for the same things.

This section will discuss how you can use the current assets financial category to analyze financial data and take decisions that your e-commerce business has to make.

Importance of Current Assets for Liquidity Analysis

Liquidity analysis looks at how well your company can pay any of its short-term and outstanding balances, should the worst-case scenario happen. Current assets are a critical component of liquidity analysis.

Briefly, you can conduct liquidity analysis through these steps:

• Identify current assets: List and quantify your assets like cash, accounts receivable, and inventory. As per definition, include assets easily converted into cash within one fiscal year under this category.
• Calculate the current ratio: Divide total current assets by total current liabilities to assess your company’s ability to cover short-term obligations.
  
• Quick ratio analysis: Evaluate your company’s ability to meet immediate obligations by excluding inventory from current assets.

For e-commerce businesses like yours, calculating liquidity is critical. It directly influences how flexible your daily operations can be and how financially stable your company is. The more liquid you are, the higher your capacity is to mitigate risk, seize opportunities, and navigate uncertainty.

However, if you have too much liquid assets, you might not maximize your resources. For example, it might be better to invest some of that liquid cash and lock it in in exchange for long-term assets.

Current Assets and Cash Flow: Impact on Day-to-Day Operations

The money that flows in and out of your business is called cash flow. This is your lifeblood – without cash flow, it’s like the human body without blood. If critical parts don’t get the necessary elements, they shrivel up and die.

Understanding the close relationship between current assets and cash flow directly influences the business’ ability to maintain its financial health.

From procuring inventory to managing overhead costs and fulfilling customer online orders, the availability and effective utilization of current assets (for example, categories like inventory and raw materials) significantly impact the rhythm of daily business activities.

Assessing Financial Health: Current Assets in Ratio Analysis

Ratio analysis is a calculation that evaluates the relationship between different financial variables to look into your company’s performance and financial health.

Current assets are critical in this analysis. This financial category provides a snapshot of the company’s financial health. For example, a high current ratio might signify a healthy liquidity position. However, a deeper analysis considering the composition of current assets might show that they actually have more short-term debt than their current assets can cover.

Here are some examples of calculated ratios where current assets are essential components:

• Current ratio;
• Quick ratio;
• Inventory turnover ratio.

This knowledge allows e-commerce businesses to make strategic decisions, identify areas for improvement, and maintain a robust and competitive financial position. Learning what current assets are and how they fit into the calculation is crucial.

Monitoring Current Assets: Techniques for Effective Management

Your current assets are one of the most important financial categories that you should keep track of, especially if you’re an e-commerce business owner. After all, the digital world is highly dynamic and things can move so much faster.

Thus, monitoring current assets is critical for maintaining your best operational efficiency. But how can your business do it? Here are some techniques.

• Conduct regular audits: Conduct periodic reviews of current assets to identify discrepancies or areas for improvement. While many businesses do it once a year, it is recommended to review your financial statements (including current assets) weekly for a 95% success rate.
• Take advantage of technology: Use accounting software and financial management tools for seamless, easy, and real-time reporting. Tools like Quickbooks and Xero are popular for this.
• Employ strategic forecasting: Employ accurate sales forecasting to anticipate inventory needs and manage cash flow effectively. Big businesses can use their in-house departments, but even small businesses can leverage third-party contractors or consultants.
• Negotiate supplier terms: Whenever possible, negotiate favorable payment terms with suppliers. This lets you have better control of your cash outflows and allows you to align them with your operating cycle.
• Create strong customer credit policies: If applicable, establish clear credit policies to manage accounts receivable and minimize the risk of late payments.

Regular monitoring of this metric allows businesses to adapt quickly to changing market conditions, optimize resource allocation, and minimize potential risk in their day-to-day. Implementing these techniques will take you far, though you don’t have to use them all. Pick the most relevant few, then modify them to your needs.

Forecasting and Budgeting Current Assets: Planning for Future Needs

To ensure that your e-commerce business doesn’t crash and burn in the next couple of months, you must have strict financial planning.

Current assets can deeply inform your forecasting and budgeting. They form the foundation of your day-to-day operations, and monitoring this financial category gives you insights into how your business functions.

Businesses like yours can plan for future needs through their current assets by adopting proactive forecasting and budgeting practices.

This involves the following:

• Sales forecasting: Anticipate future sales trends using current and historical current asset levels, then adjust inventory levels accordingly. This ensures you don’t overstock.
• Cash flow projections: With a thorough knowledge of past and present current assets, you can develop accurate cash flow projections to understand the liquidity requirements for upcoming periods in your business.
• Budget allocation: Allocate budgetary resources efficiently by considering the composition and turnover rates of current assets.

By integrating these practices, your online businesses align your current asset management with future goals, enhance operational efficiency, and strengthen your financial position.

Final Thoughts

Your business’ balance sheet might be one of the most intimidating pieces of document you know and own – but don’t worry. At its core, it’s just composed of different digestible financial categories that help your business function in some way.Learning about your current assets will help you plan for the near future.