Each of these forms of current assets has a dollar value related to them. In the next section, the meaning of this to the owner is explained.<\/span><\/p>\n

Current Assets Ranking<\/span><\/strong><\/h2>\n

The key for any owner of a small business is having cash available to run the company. From having cash in the till to make change in the retail environment to having access to cash in an instant to deal with an unforeseen situation can make or break a small business operation. Cash is the life of any operation. Without cash you are dead in the water. Not only is it embarrassing but employees, vendors and customers can lose faith in your ability to manage a business if you do not have cash available to deal with your day-to-day operations. To have cash available, you need to understand the ranking of the current assets so you can make sure you have enough cash each day to deal with your day-to-day operations. Let\u2019s rank the current assets:<\/span><\/p>\n

\u00a01)\u00a0 Of course, having cash in the till box and bank account are of the most important value in any business. Both are these are of the most importance in any business.\u00a0 Cash in the till is critical just to make change for a sale.\u00a0 Cash in the bank allows you to pay any immediate needs including purchasing inventory or raw goods (especially if you operate a restaurant).
\n<\/span>2)\u00a0 \u00a0Current receivables are the next source of cash for the small business owner. He should be aware of the cycles of his primary customers. Regular payments from the ongoing customer are essential to maintaining the level of cash in the company.
\n<\/span>3)\u00a0 \u00a0Other forms of quick cash include the bank notes and investment related items. If in a pinch, the owner should resort to using these sources of funds for cash, however, there will be a fee to convert bank notes, CD\u2019s, and investments into cash.
\n<\/span>4)\u00a0 \u00a0Extended receivables are another source of cash. However, the planning aspect comes into play when the owner reaches this far into his current asset portfolio for sources of available cash. It is wiser and easier to use other forms of cash sources and payment deferrals before reaching this level of current assets for cash.<\/span><\/span><\/p>\n

In general, cash is ranked from the most liquid to the least liquid in availability. This is one of the many definitions of liquidity in business. See <\/span>Liquidity – What does this mean?<\/a><\/span><\/strong> for further understanding of the concept of liquidity. All cash in the till and bank account is liquid, but depending on the nature of your business operation, the issue of ranking liquidity between receivables and inventory is strictly attributed to your operation. If in retail, inventory can be turned into cash faster than collecting receivables. If you are in the service industry, you will have very little to no inventory and must rely on receivables to inject cash into your operation. For some businesses, you have both available and there is a mix of the two current assets to generate cash.\u00a0 Each owner has to look at his current assets in his own way to determine cash availability.<\/span><\/span><\/p>\n

Current Assets – Decision Model<\/span><\/strong><\/h2>\n

The primary business concept for the owner is to review the business cycle to relate needs to resources. Current assets are resources for cash. The highest value resource is the inventory as it is sold generates immediate or future cash. The cycle is inventory into sales, sales into receivables, receivables into cash, and then cash is used to buy new inventory. This is the business cycle.\u00a0 <\/span><\/p>\n

There are several tools available to help the small business owner understand his cycle. A good tool is a historical record of retail sales based on the time of year to collections of receivables. Use your past as a guide for the future. Other timing factors can be used too. As an example, if you are a seasonal operation, you will have strong sales for a short period of time, as you collect this money, reserve some money by purchasing CD\u2019s that will mature during the business lean months. This way cash is readily available by exercising cash inflow throughout the entire calendar year.<\/span><\/p>\n

The best tool is planning. Use a simple spreadsheet weekly to determine sources of cash for the upcoming week, two weeks out, one month out and then for the three-month window. Look for the payment schedules for your receivables especially the extended and aged accounts (sometimes referred to as the book of receivables). By reviewing and staying on top of the resources of cash, the owner of the business will always have cash available when it is needed. Again, relate the needs to the resources.<\/span><\/p>\n

Summary – Current Assets<\/span><\/strong><\/h2>\n

One of the major sections of the balance sheet is current assets. There are generally three groups of current assets: cash, receivables, and inventory. These three groups form a part of the business cycle of inventory to sales, sales to receivables, and then receivables to cash. When an owner understands his business cycles, relates these cycles to the concept of liquidity and uses planning and accounting tools to help him, he can always ensure enough cash is available to meet the day-to-day needs of his business. Act on Knowledge.<\/strong><\/span><\/p>\n