Current Assets & Fixed Assets
In general, current assets are assets that are liquid (assets that can be converted into cash quickly) such as bank balances, petty cash, accounts receivables (what customers owe the company or what other contractors might owe the company for services rendered). Having a good amount of current assets is critical for companies to secure finances such as investments and loans from local banks.
However, although having a good amount of current assets is a crucial factor for most businesses, for construction companies, having an adequate amount of fixed assets would be a positive indicator that the company is ‘business ready’. Fixed assets are all the ‘things’ that the company owns such as the toolbox, the tractor, the steel cables, concrete/ cement bags or even the mini excavator that was purchased for some of the upcoming projects where the mini excavator will be needed.
However, it is important to know that the mini excavator was purchased; hence it is deemed as a ‘fixed asset’ of the company. From another perspective, if the purpose of the machinery was for a mini excavator hire, then it will effectively be a liability because the company has to pay the mini excavator supplier the due hire or rent at some point in time. Nevertheless, although the use was a mini excavator for hire, the tasks that it would perform during the period of hire will be included in the final invoice given to the client at an adequate ‘mark-up’.
It is due to this reason that investors often look at various financial ratios in order to determine the financial health of a company. For instance, the ‘acid test’ otherwise also known as the quick ratio takes the total current assets of the company and divides it by the total current liabilities. If the result of that equation is below the value of ‘1’, then it shows that the company will not be able to meet all its short-term obligations such as rentals and owed salaries. However, the evaluation is different for different industries and for the construction industry a value of +/- 1 by 10% is considered stable. We will cover long term and short-term liabilities in the next article installation, stay tuned!