What is a Permanent Current Asset?
A permanent current asset is the minimum amount of current assets a business needs in order to continue operating. Cash, accounts receivable and inventory being examples.
A certain amount is needed for the business to carry on working. As an example, a business may not have enough cash or accounts receivable to cover the costs of paying suppliers and loans. If you can’t pay your suppliers or service your debts, you’ll be out of business in no time!
We only use current assets, rather than fixed assets, as they are assets that have a turnover within one year. It’s very difficult to quicly liquidate a fixed asset such as a factory. Imagine how long it would take to sell, with legal fees, negotiations and moving out!
Managing Permanent Current Assets
As we’ve discussed above, a business in order operate requires a certain amount of current assets to remain running.
So what do you do when it looks like there isn’t enough?
Usually you have two options, long or short term financing.
Long term financing is usually the preferred option as you have longer to pay back the loan, it won’t disrupt your current assets as much. Interest can often be lower as banks will see a longer term loan as less risk.
Short term financing is the other solution. This can sometimes work if you just need an injection of cash for a very short period of time (maybe you’re just waiting for a massive order from a client to come through), in this case short term financing can work. The downside this can often have higher interest rates.
Example of a Permanent Current Asset
A hotel at a ski resort has $20 million of cash, $5 million in trade debtors and $2.5 million in inventory during May – October. These are the permanent current asset amounts needed for the company to operate. During the ski season the trade debtors increases to $12.5 million, cash to $25 million and inventory to $4 million. This increase in current assets is considered to be Temporary Current Assets.