Short Term Assets

Short-term assets (also known as current assets) are those assets that are highly liquid and can be easily sold to realize money from the market, typically within one year. Such short-term assets have a maturity of fewer than 12 months and are highly tradable and marketable. Examples include inventory, cash and cash equivalents, and account receivables, among others.

Managing short term assets diligently allows businesses to calculate multiple crucial ratios like turnover ratio, and current ratio, and act as an important metric to determine the liquidity of the company. It is vital to understand that too much capital allocated to this account in the balance sheet could indicate the underutilization of resources and poor financial health.

• Short-term assets, also known as current assets, have short durability. It includes expenses, cash, securities, accounts receivable, and rent. Moreover, it also helps describe the company's liquidation and daily business operations.
• They involve cash equivalents, debtors or accounts receivable, prepaid expenses, and short-term investments.
• Short-term assets are highly liquid, making them a good portion of the analysis. Any company cannot afford to have too many current assets on their balance sheet, cash in hand, and the bank.
• The current or short-term assets are convertible and usable. They are of physical form and are tangible.

Short-term assets, often referred to as current assets, are a vital component of a company's balance sheet. These assets are expected to be converted into cash or used up within a relatively short period, usually one year or an operating cycle, whichever is longer. They serve as a measure of a company's liquidity and its ability to cover short-term obligations.

The management of short-term assets is crucial for maintaining operational efficiency and meeting short-term financial obligations. Striking a balance between optimizing these assets and avoiding excess inventory or uncollected accounts receivable is key.

Analyzing the composition and trends of short-term assets helps evaluate a company's working capital management, efficiency, and potential liquidity risks. It also provides insights into a company's ability to respond to sudden market changes or capitalize on new opportunities. Short-term asset management is integral to a company's financial health, as it supports day-to-day operations while enabling strategic decisions for sustainable growth.

Hence, careful analysis of short-term assets and liabilities is highly necessary to keep a company operating efficiently. Also, current assets are highly used in ratio analysis of the company, which tells the user where the company is standing compared to its global peers.

Let us understand the concept and its intricacies through the examples below. They shall provide us a practical overview of the concept.

Example #1- Cash and Cash Equivalents

Cash and cash equivalents are the liquid cash present in the company's current balance sheet of the company. It also consists of a certificate of deposits and cash in hand andthe bank.

Example #2- Debtors or Accounts Receivables

Debtors or accounts receivables are the unpaid money of the company against which an invoice has been raised, but the money has not yet been furnished to the company. That is why it is an asset for the company and has its certification and payment cycle.

Example #3- Prepaid Expenses

Prepaid expenses are expenses paid in advance for a future period by the company. That is the reason it is showing as an asset to the company. Examples of prepaid expenses are office rent, generally paid in full for the quarter or a year as per the lease agreement.

Example #4- Short term Investments

When the company has idle cash on its balance sheet, it is forgoing the opportunity cost of investment for that idle cash. So, the company opts to invest the unused money in various short-term ventures such as mutual funds or demand deposits.

Let us understand the advantages of managing short term assets through the points below.

• They are highly liquid and used for working capital management of the company.
• They are used for ratio analysis and peer group analysis. It also talks about the liquidity state of the company and how liquid the company is for repaying its short-term obligations.
• Having a good amount of current assets on the company's balance sheet makes the company liquid in nature. Also, it tells us about the company’s plans as more cash and more retained earnings are used for the future and further investment in the company's future goals.
• Current or short-term assets are highly convertible and usable. They are of physical existence and are tangible.

Despite the advantages mentioned above, there are a few other factors that could prove to be a hassle for businesses. Let us understand the disadvantages of short term assets and liabilities through the explanation below.

• Too much of the balance sheet is tied up in the current assets; this can be a sign of the bad financial health of the company.
• Too much capital stuck in the company’s existing assets signifies its inefficient working capital, and the company is not properly using its current assets. It can cause a loss of market share and business.
• Short-term assets are highly liquid, making them a good portion for analysis as any company cannot afford to have too many current assets on their balance sheet, especially cash in hand and the bank.

Managing short term assets and long term assets are two categories of assets found on a company's balance sheet. They have distinct characteristics and functions. Let us understand the key differences through the comparison below.

Short Term Assets

• Expected to be converted into cash or used up within a relatively short period, usually one year or an operating cycle, whichever is longer.
• Primarily aimed at supporting a company's day-to-day operations and meeting short-term financial obligations.
• Examples include cash, accounts receivable, inventory, prepaid expenses, and short-term investments.
• Provide liquidity and help maintain working capital to cover short-term liabilities.

Long Term Assets

• Expected to provide benefits to the company over an extended period, typically beyond one year or an operating cycle.
• Primarily contribute to the company's productive capacity, growth, and value creation.
• Examples include property, plant, equipment, intangible assets, long-term investments, and goodwill.
• Serve as assets that generate revenue, contribute to operations, and enhance the company's competitive advantage.

This article has been a guide to what are Short-Term Assets. Here, we explain its examples, advantages, and disadvantages, and compare them with long-term assets. You may learn more about corporate finance from the following articles: –

• Examples of Current Assets
• Current Assets Formula
• Real Assets Definition
• Short Selling Meaning