If someone asked you to provide numbers to demonstrate the stability of your business or the capacity of your company to meet its obligations, could you? One way to answer is by calculating current assets to generate a concrete number representing your business’s liquidity—and you can even plug this stat into different formulas for more insight into the financial health of your business.
If you want to take charge of your business, you need to understand how to calculate and use current assets. In this article, we’ll show you how to calculate total current assets, net working capital, current ratio, quick ratio and average current assets. You’ll also learn how to improve your current asset numbers.
What Are Current Assets?
A current asset is cash or any other asset that you can convert to cash, consume, or sell within a year or within the operating cycle of a business, whichever term is longer. Current assets are also known as “short term assets” or “liquid assets.”
Businesses calculate their total current assets by adding together all assets they can convert to cash, consume or sell within one year of the date of the balance sheet.
If it typically takes a business longer than 12 months to go from cash to cash within their means of revenue generation, that means the operating cycle is longer than a year. Businesses with longer operating cycles use the length of their operating cycle to calculate their total current assets on a balance sheet.
Purpose of Current Assets
While this exercise may seem esoteric, current assets are a measure of a company’s financial health. When applying for a business loan, you can pledge your current assets as collateral to help you secure the loan.
If a major customer backed out of a contract or changed providers, how much pain would your company experience? Would you be able to pay the bills with other sources of income? With sufficient current assets, you can survive issues like these.
If your current assets are low, which is known as having a weak asset position, small fluctuations in revenue can cause significant problems for your business. You need to strengthen your asset position so you can deal with unexpected financial challenges and still pay off short-term debts.
On the other hand, if you have too many current assets, you may be missing opportunities to use cash on hand to increase revenue.
Demonstrating that you have the right balance of current assets—by calculating total current assets and computing related ratios and averages—is an excellent way to signal to banks, lenders and investors that you are secure, stable and reinvesting your money wisely.
Examples of Current Assets
An asset is anything owned by a business that has value. Current assets include cash and all assets that can or will be converted to cash (or sold/consumed) within a year.
All of the following assets count as current assets:
- Cash equivalents
- Marketable securities
- Short-term investments
- Accounts receivable
- Prepaid expenses (like rent or insurance paid in advance)
- Advance payments on future purchases
- Raw materials
- Finished goods
- Office supplies
- Other liquid assets
When determining whether an asset is current or not, you must consider the amount of time it would take to liquidate that asset while continuing to operate your business. An asset that takes you longer than a year to liquidate is not a current asset.
Other types of assets besides current assets include intangibles like trademarks, patents and goodwill, and non-current assets (also called long-term assets). Non-current assets are things that cannot be liquidated as needed, like restricted cash (cash that is held and cannot be withdrawn or used for operations), depreciable assets, receivables not due in 12 months or less, land and physical assets like buildings.
How to Calculate Total Current Assets
To calculate your company’s total current assets, you must add together all current assets. Here’s how you can determine whether to include an asset in your total current asset calculation:
- Does the company own it?
- Does it have tangible value?
- Do you expect to convert it to cash, sell it, or consume it within a year?
If you can answer yes to all three questions, then the asset should be included in your total current asset calculation.
Before you use the current assets formula, you will need to create a list of all your current assets. The traditional method is to list them in order from most liquid to least liquid, with cash at the top. Once this is organized, you’re ready to use the current asset formula.
Current Assets Formula
To calculate current assets, add all your assets together to determine your total:
Current Assets =
Cash and Cash Equivalents
+ Marketable Securities
+ Short-term Investments
+ Accounts Receivable
+ Prepaid Expenses
+ Raw Materials, Finished Goods, and Inventory
+ Office Supplies and Other Equipment
+ Other Liquid Assets
As you calculate current assets, be sure you understand each category of asset, so you don’t leave anything out.
Cash includes all bills, currency notes and equivalents, checks not yet deposited, and petty cash. Cash equivalents are things like money stored in the bank or money market accounts. These items are listed first on the balance sheet because they are the most liquid asset.
Accounts receivable means the total value of your business’s outstanding invoices, owed by customers for products delivered or services rendered. Ideally, you should collect all accounts receivable within 90 days or less, and with a collection rate of 90% or better. If you want to be conservative, allow a “fudge factor” for less than 100% collection rate.
Prepaid expenses or advance payments are payments you have made ahead of time, like rent or insurance paid in advance.
Inventory includes any raw materials, products in the process of being manufactured, finished goods, or other saleable items (other than office supplies) your company can convert to cash.
You may count office supplies and other equipment as current assets, but only if you could realistically sell or consume them within a year.
Other liquid assets are any other assets you plan to convert to cash within a year. These are easy to overlook, so be sure you include them in your total. Examples include long-term investments that will mature within 12 months or property you plan to sell within the year.
Practical Examples Using the Current Assets Formula
After you make your balance sheet of short-term assets, you just need to add them up. Here’s a sample balance sheet of current assets.
- Cash and Cash Equivalents $75,000
- Marketable Securities $50,000
- Short-term Investments $15,000
- Accounts Receivable $20,000
- Prepaid Expenses $12,000
- Inventory, Raw materials, and Finished Goods $45,000
- Office Supplies and Other Equipment $25,000
- Other Liquid Assets $10,000
Using the above numbers, here’s a sample calculation of your total current assets:
$75,000 + $50,000 + $15,000 + $20,000 + $12,000 + $45,000 + $25,000
= $242,000 in Total Current Assets
Using Current Assets
Calculating total current assets is just the beginning of determining the financial health and liquidity of your business. Now that you know which assets to include on your balance sheet, you can use the number in other formulas to figure out areas for improvement and to keep your business running optimally.
Current Assets Ratios and Averages
Here are the four main formulas involving total current assets that you need to understand:
- Net Working Capital
- Current Ratio
- Quick Ratio
- Average Current Assets
To calculate Net Working Capital, subtract current liabilities from total current assets. Current liabilities are all amounts due to be paid to creditors within the next 12 months, and typically include categories like accounts payable, accrued expenses, short-term debt, and interest payable.
Net Working Capital =
(Current Assets) – (Current Liabilities)
Net Working Capital is an indication of a company’s liquidity. Having a positive Net Working Capital indicates your business is financially healthy and able to meet short-term obligations.
The Current Ratio is a ratio computed by dividing current assets by current liabilities, as follows:
Current Ratio =
(Current Assets) / (Current Liabilities)
Like Net Working Capital, the Current Ratio is a means of assessing the liquidity of a business. At a minimum you want your business to have a Current Ratio of 1.0. A Current Ratio of less than 1.0 indicates low liquidity and poor financial health.
Ideally, you want your business to have a Current Ratio of 1.2 to 2.0. That means your current assets equal 120% to 200% of your current liabilities, and you have enough liquidity to operate month to month without falling behind on obligations.
If your Current Ratio is above 2.0, you may not be putting your cash on hand and other current assets to work, meaning you should consider reinvesting revenue at a higher rate to increase future income.
The Quick Ratio is another way to determine liquidity, similar to the Current Ratio, but it uses a limited number of current asset categories:
Quick Ratio =
(Cash) + (Cash Equivalents) + (Marketable Securities) + (Accounts Receivable) / Total Current Liabilities
Think of the Quick Ratio as a more conservative, short-term version of the Current Ratio. Businesses and banks can use the Quick Ratio as an easy way to determine the ability of a company to pay its short-term obligations on time.
Unlike the other formulas in this section, the Average Current Assets figure isn’t a ratio. Average Current Assets is the mean value of current assets over a period of two or more years.
Here is how to calculate Average Current Assets:
Average Current Assets =
(Total current assets for prior 12-month period) + Total current assets for most recent 12 month period) / 2
Business owners can use Average Current Assets to manage costs, determine monthly budgets, and plan for the future. You can also add in multiple years; if you do, remember to divide the total of all assets by the number of years you’re including. For example, if you add four years of current assets together, divide by 4 to determine Average Current Assets over the past four years.
Increasing Current Assets
Now that you understand how to calculate current assets and put the number to work in a few different formulas, it may be to your advantage to increase your current assets.
If your Net Working Capital is low or negative, or if your Current Ratio isn’t high enough, you should track your total current assets on a monthly basis and recalculate your ratios each month to see if the financial health of your business is improving.
These are the best ways to improve your total current assets and related ratios:
- Promptly collect invoices and other receivables (within 60 days)
- Use caution when borrowing
- Liquidate all unused assets
- Invest carefully
If you don’t promptly collect when invoices are due, it becomes more difficult over time to collect from a logistical and human resources standpoint. If customers know you collect regularly, they’ll pay on time.
If you need a loan, be sure only to borrow the minimum you need and nothing more.
If you do an asset inventory and find unused assets, liquidate them if you don’t plan to use them within a few months, or a year at most. You can put the cash to work better by investing it wisely.
When you do have extra cash, invest it carefully to increase your cash pool, but be cautious. That doesn’t mean always to be conservative, but rather to find the right balance of risk and return based on your current assets. As your current assets and Current Ratio increase, you can take advantage of the situation by pursuing investments with higher yields.