The current assets formula, sometimes called the total current assets formula, is a key indicator of your business's short-term financial health. Your goal should 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, one of the required financial statements that must be completed each year. If you don’t have a financial background, it can be tough to determine the meaning of each line on the balance sheet’s current assets portion.
It’s a good idea to work with your accountant or bookkeeper. But when reviewing yourself, anything easily turned into cash within one year or less goes into the current assets category. These include cash, cash equivalents, inventory, accounts receivable, marketable securities, and prepaid expenses.
Cash and Cash Equivalents
Cash and cash equivalents include cash in your business bank account, payments you’ve received and haven’t deposited yet, and petty cash.
Accounts receivables are payments customers owe you for goods or services you’ve provided. Many small businesses, especially B2B businesses, bill customers and don’t require immediate payment. In most cases, invoices are net 30, 60, or 90 days. Accounts receivables are classified as current assets because the payment comes in as cash or can be converted to cash like with a check.
Inventory is your unsold goods available to replenish stock. It’s a current asset because within one year, the business will either sell the inventory to customers or can liquidate. Those with perishable inventory should be careful not to overstock.
There can be separate line item on the balance sheet for supplies - raw materials or other items that you need for production or business operations.
Marketable securities are a liquid asset, meaning they can easily be converted to cash. They include holdings such as stocks, bonds, and other securities that are bought and sold daily.
Any expense that is paid in advance of actually receiving the benefit of the payment is considered a prepaid expense for accounting purposes. Prepaid expenses are recorded on your balance sheet as a current asset, and then recognized as an expense when it is incurred.
Why is it important to understand your current business assets?
Knowing your current assets can help you understand your operating expenses better. This report helps you determine the money available to your business.
Formulas based on the total current assets you need to know
Current Ratio = Current Assets ÷ Current Liabilities
This tells you the percentage of your firm’s debts that you can pay off with liquid assets. Calculating the current ratio also allows for easy comparison over 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 working capital formula tells you whether you have enough assets on hand to pay off all bills and debts due within one year. If you have a positive amount of net working capital, that means you have 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 owners an idea of the average assets they have on hand during a typical one-year period. This can help you plan for upcoming goals.
What’s a good current ratio for a small business?
And ideally, you should strive for a current ratio of 1.2 to 2.0. A ratio less than one means you don’t have enough assets to cover your liabilities. A ratio greater than two means you might not be investing cash in opportunities that can generate additional revenue.
How to increase your current assets
If your current assets calculations show that you’re coming up short, you can change this dynamic number. These are some steps you can take to improve your situation.
Fast receivables collection
Accounts receivables is an important portion of your current assets. You should strive to have invoices paid promptly – you don’t want too many of overdue customers. For information about setting up effective invoicing, review this article:
Work with your accountant and review your business plan to determine how much you should borrow and don’t go over that amount. Make sure you have the cash flow to make full payments on time for the life of the loan. Keep your credit scores strong so you can qualify for the lowest cost capital with the longest terms.
Liquidate Unused Assets
Is there unused equipment that’s sitting around your shop? That even mean something as simple as a computer or copier. If you’re not using part of your office, you can sub lease the space for extra cash. If you go this route, you’ll increase your current assets.
When investing, strive for a balance of high risk, high return investments and low risk, low return investments. This also increases your current assets and improves your cash position.