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From our blog: SUNDAY,
DECEMBER 9, 2012
A
business keeps a certain level of inventory so that it will not face
a stock out situation. Similarly it holds a minimum amount of cash and
bank balances to meet day-to-day expenses. It also extends credit to
customers, resulting creation of sundry debtors or bills receivable.
All these are components of current assets. These are called
current assets since they are expected to be converted
into cash or cash equivalent in a short period of time, less than a year.
The current assets are not totally financed or funded by the business's own
resources. The current assets are partly funded by suppliers by
extending credit, short term borrowings, etc.
As is the case of current assets, the current liabilities are also
short term in nature and are expected to be cleared
by the business within a short time, in any case less than a year.
Current Ratio refers to comparison of current assets to current liabilities.
Since current liabilities have to be honored in time to maintain the
reputation and creditworthiness, the organization should hold sufficient
current assets to meet current liabilities. The current ratio measures
the adequacy of current assets vis-a-vis current liabilities.
The ratio is obtained by dividing the total current assets by current
liabilities.
A number of 2 is considered minimum according to general financial management
standards. However, in my experience, in India, and especially among
small and medium companies, it is seldom 2. The current ratio actually
ranges between 1-2 and in a few cases the ratio falls even less than one.
Indian banks generally consider any number 1.25 as good. Many banks
expect it to be at least 1.17 to be considered as eligible for takeover of an
account from another bank.
When it falls below one, the enterprise should induct long
term funds to strengthen its current ratio.
Ace has
helped many clients improve their current ratio and working capital position
by arranging working capital term loans of long maturities.
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Assist writing
your business plan and presentations for investors, CMA data/ project report
for banks/ Financial
Institutions (FIs).
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Small and start-up companies do not have in-house financial
expertise to periodically check their financial health…
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