Current Assets and Current Liabilities
The better management of current assets leads to better management of current liabilities and help organizations improve their working capital. If the firm has an efficient accounts receivables management system, it may be able to pay payments to suppliers in a timely fashion and may even qualify for discounts for prompt payment (Booth and Cleary) which should improve cash position. Similarly, sufficient cash reserve means the organization may need a lower amount of short term loans, resulting in better short term liquidity.
Not all current assets are desirable one of which is inventory. Inventories do not only result in unproductive tie-up of funds (Morningstar, Inc.) but also increase operating costs due to storage costs and wear and tear over time. Efficient inventory management system improves liquidity as well as profitability by reducing storage costs as well as the need to discount excess inventory to attract customers. It may also improve current liabilities as the firm may not have to borrow to meet operating expenses due to cash shortage.
Efficient management of current assets also leads to better management of current liabilities through cheaper access to loans. Lenders measure the borrower’s liquidity position and non-payment risk in determining the loan terms including interest rate. A healthy current asset list indicates a lower risk of non-payment, resulting in favorable term loans. This means the short term interest obligations will be lower and operating liquidity will be better as compared to an organization with less healthy current asset position. It is clear that a better management of current assets also results in an improved current liabilities position.