Liquidity and Debt
Current assets less current liabilities (net current assets) also known as working capital is a broad measure of liquidity. As liquidity is the engine that drives cash flow it is important that current assets are carefully managed.
Current Assets and Fixed Assets
As well as cash itself, current assets are restricted to such items as accounts receiveable and stock-in-hand that are perceived to be cash convertible within twelve months. Current liabilities on the other hand include all debt payable within twelve months, whether arising from the acquisition of current assets, fixed assets or financing.
Although tying too much cash up in current assets is never a good thing, there will at least be the prospect of eventually turning them into cash. This will not be the case for current liabilities incurred through the acquisition of fixed assets.
Forecasting and Planning Current Liabilities
When planning a business, forecasting liquidity is vital therefore, most especially in respect of current liabilities. A high level of current liabilities always means a low level of liquidity and the risk of running out of cash.
Such forecasts however can be easily and comprehensively created using Figurewizard which produces them simply from your forecast figures for sales, margins, overheads and so on.
To view working examples of these forecasts follow the links below.