What Are Current Assets in Finance?

Current assets are a company's most liquid assets, which are expected to be converted into cash within one year or less. These assets are important for a company's short-term financial health, as they are used to pay for day-to-day expenses, such as rent, utilities, and wages.

Types of Current Assets

Here are the main types of current assets:

• Cash and Cash Equivalents: This includes physical currency, bank deposits, and highly liquid investment securities that can be quickly converted into cash.
• Marketable Securities: These are investments like stocks or bonds that a company plans to sell within a year.
• Accounts Receivable: Money owed to a company by its customers for goods or services delivered but not yet paid for.
• Inventory: Goods available for sale, as well as raw materials and work-in-progress that will be sold.
• Prepaid Expenses: Payments made in advance for goods or services to be received in the future, like insurance or rent.

Example:

If Infosys has ₹10,000 in cash, ₹15,000 in accounts receivable, ₹20,000 in inventory, and ₹5,000 in prepaid expenses, then Infosys's total current assets would amount to ₹50,000.

Importance of Current Assets

• Liquidity: Current assets are indicators of a company’s liquidity or its ability to meet short-term obligations without needing additional capital.
• Operational Efficiency: Adequate levels of current assets enable uninterrupted business operations, allowing a company to purchase inventory, manage payroll, and handle emergencies.
• Financial Health: Investors and creditors often examine the ratio of current assets to current liabilities (working capital) to gauge a company’s financial health and its ability to grow in the short term.

Current Assets vs. Non-Current Assets

While current assets are expected to be used or converted into cash within a year or operating cycle, non-current assets, such as property, plant, and equipment (PPE), long-term investments, and intangible assets like patents, are held for more than one year. Non-current assets are utilized for the company's long-term operations and growth, and they are not readily converted into cash.

Managing Current Assets

Effective management of current assets involves:

• Cash Management: Ensuring there’s enough cash on hand to meet immediate expenses.
• Inventory Management: Balancing sufficient inventory to meet customer demand without holding excess inventory that ties up resources.
• Receivables Management: Implementing credit policies that encourage timely payments from customers to avoid cash flow issues.

Conclusion

Current assets are a critical aspect of a company's financial health, influencing both day-to-day operations and short-term financial stability. For businesses like Infosys, efficiently managing these assets can lead to improved liquidity, operational effectiveness, and the ability to fund growth initiatives without incurring additional debt or diluting equity.