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Have you ever sold something you own on a digital marketplace for cash? Have you ever used this cash to fund a payment plan or outstanding debts?
If you answered “yes,” I’m not surprised. People do it, and so do businesses.
Selling assets to clear off liabilities could protect your dividends and retained earnings. Now, the question is: are all assets current assets? And most specifically, is inventory a current asset?
Current assets are a call for emergencies. They prevent the complete financial collapse of companies as they get liquidated, and the cash can be used to pay off loans. Evaluating which assets are your current assets or non-current assets is important, as not all assets a company owns can be liquidated.
Selling assets like clothing or electronics can be a great alternative to taking out a loan to fund repayments. Any item or inventory that can be sold for quick cash is referred to as a current asset.
Before analyzing your inventory, use inventory control software to get real-time insights into your current assets, purchase date, and depreciation rate. Then, you can make informed decisions about which assets to liquidate for your company’s breakeven.
Is inventory a current asset?
The short answer is yes; inventory is a current asset because it can be converted into cash within one year. Other examples of current assets include cash, cash equivalents, marketable securities, accounts receivable, pre-paid liabilities, retained earnings, and other liquid assets.
Inventory is a current asset because it is something a company owns yet hasn’t sold. An example of this would be unsold merchandise in retail, also known as backstock.
When cash is needed quickly, it’s important to have a current asset like inventory on hand so that it can be liquidated and used to recuperate losses. But why is inventory a form of liquid cash, and how long until we can convert it without any depreciation or quality issues?
There are different ways of tracking your inventory assets and updating their consumption or retention status. For example, if you run a restaurant, tracking bought inventory and level of ingredients with restaurant inventory management software can predict accurate inventory information, bookkeep food ingredients, and alert on stock replenishment and accrued expenses for a particular accounting period.
What are current and non-current assets?
Current assets are cash or cash equivalents a business can leverage to clear outstanding debts, account payables, loans, and liabilities. Evaluating assets and their values helps a firm analyze its financial strength and cash reserves. Current assets can be of many types.
Some common types are marketable securities, inventory, accounts receivables, retained earnings, profits, prepaid expenses, treasury funds, and short-term investments. These are quick sources of income that come in handy during a business crisis. These assets can be liquidated easily and without hassle, without getting multiple approvals and government intervention.
Noncurrent or fixed assets are long-term assets or investments that cannot be easily converted into cash within the next year. Fixed assets need to be managed through the right enterprise asset management software so that you have access to all previous records. Fixed assets provide service to the business, reduce manual workload, and automate business operations to churn more output with less manpower.
They are also essential for a company’s long-term growth and operations. But the asset’s cost is something that a company needs to pay either instantly or in installments. Fixed assets are amortized over time, and the cost of low book value is added to the balance sheet. Some examples are property, plant and equipment, long-term investments, deferred tax assets, manufacturing supplies, and other noncurrent assets,
Is inventory always a current asset?
Inventory is actually considered more than just backstock. It is considered a current asset as it can be sold, consumed, or used within a standard operating cycle of a business. Mostly, inventory is always considered a current asset as it has a cost of goods (COGS) attached to it. Inventory is replenished every month or quarter so the company doesn’t run out of stock. It is the easiest medium of cash equivalent as it is a finished good with a fixed cash value. It includes raw materials, work in progress (unfinished products), and finished goods. For example, aluminum and steel can be considered inventory.
However, if a company operates in an industry where turnover is slower or the company has longer production runs, some of the inventory could be considered “fixed” or “intangible.” At most, inventory is a source of income as it represents the goods kept aside for sales in a business’s normal course of operations.
The liquidity of a business’s inventory also depends on its demand, depreciation, amortization, seasonality, industry sector, and other factors. So, while you think you can offload that backstock of 10 excavators at $100,000 per item, it won’t matter unless there’s a need for them.
A more liquid example of inventory is rain ponchos. Really, rain ponchos? Well, there’s a higher chance of having a large backstock throughout the year. During wet seasons when the demand increases, your chances of offloading thousands of items are higher as well. Rain ponchos, unlike excavators, also don’t depreciate in value over time.
Having relevant inventory that can be sold quickly for cash is important.
Inventing newer cash streams with inventory
Businesses know the real perils of investing capital and selling goods without letting the variable gross margins bleed. Extracting the most out of operating income and producing maximum finished goods to complete a batch cycle is the ideal goal a business opts for. But, even if businesses receive accounts, they also have more liabilities to pay as their workload increases. Having a sporadic warehouse of inventory that can be liquidated at an urgent notice can prevent breakevens and stabilize the financial shape of a company.
Improve visibility into your warehouse operations and keep track of goods that are offloaded and trucked with the best warehouse management software to align your production processes.
This article was originally published in 2019. It has been updated with new information.
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