Operating Current Assets
Operating current assets are a subset of a company’s total current assets that are directly related to the company’s core business operations. These are the assets that are involved in the day-to-day activities of the business and are expected to be used up or converted into cash within one year or one operating cycle, whichever is longer.
Operating current assets typically include:
- Accounts Receivable: These are amounts owed to the company by its customers from sales made on credit.
- Inventory: This includes raw materials, work-in-progress, and finished goods that the company plans to sell.
- Prepaid Expenses: These are payments for goods or services that the company will receive in the future, such as prepaid rent or insurance.
Operating current assets exclude current assets that are not directly related to the operations of the business, such as marketable securities, short-term investments, and cash not required for operations.
By focusing on operating current assets, a company can better manage its working capital and improve its liquidity and operational efficiency. For instance, reducing the amount of inventory or accounts receivable can free up cash for other uses, while increasing prepaid expenses might be a sign that the company is effectively using its resources to take advantage of discounts or avoid future price increases.
Example of Operating Current Assets
Let’s take a hypothetical example of a company, say, “ManufactureCo,” and look at its balance sheet to determine its operating current assets.
Suppose the company’s current assets include:
- Cash: $50,000
- Marketable Securities: $20,000
- Accounts Receivable: $100,000
- Inventory: $150,000
- Prepaid Expenses: $30,000
Adding these operating current assets together, we get:
Operating Current Assets = Accounts Receivable + Inventory + Prepaid Expenses
Operating Current Assets = $100,000 + $150,000 + $30,000 = $280,000
So, ManufactureCo’s operating current assets total $280,000.
This number represents the resources tied up in the company’s day-to-day operations, and these assets are expected to be turned into cash within one year or one operating cycle. Understanding this figure can help the company manage its working capital more effectively and improve its operational efficiency.