Working Assets

The relative amount and kind of the free "working," or "liquid" assets, i.e., cash or cash equivalents, of any organization, requires in many cases closer observation and analysis than the property accounts, or fixed assets. It is with the current assets that an enterprise meets its current needs, paying its current expenses and obligations. If the working assets do not suffice for this purpose the company must be able to borrow additional funds to avoid financial embarrassment. A receivership might result, therefore, even when the value of the fixed assets is in excess of that of the actual liabilities, or when the net earnings are sufficient to cover interest on funded obligations.

Liquid assets are thus a part of the necessary working machinery of any business organization. When the amount on hand is depleted, it must be replenished by borrowing or by reduction of wages or costs of upkeep and other necessary expenses and charges. Wage-cutting, however, may lead to costly labor difficulties, and reduction of necessary expenses may impair the company's credit, rendering impossible the securing of new capital required for improvements and extensions. Need for working capital arises mainly from the expenditures for materials and supplies, wages, taxes, and the like, and also from expenditures for upkeep, improvements, and extensions caused by business expansion.

Among the working assets, in addition to cash and money owing to the business, are included the inventories on the finished goods, materials and supplies, and the readily marketable securities. The items requiring first consideration, however, are cash and accounts receivable. The size of the cash balance together with other items readily convertible into cash, when compared with the current requirements and the amount of construction work on hand, may indicate roughly whether or not additional financing through sale of securities is necessary. The borrowing of additional funds has a direct influence, in some instances favorable and in others unfavorable, on the market value of securities already outstanding. Financiers and investors, therefore, scrutinize closely the cash position of a debtor concern. It is frequently the best available gauge of financial status.