Maximizing Liquidity: Understanding Short-Term Assets and Liabilities in Business Operations

A firm’s short-term assets such as inventory and its short-term liabilities such as money owed to suppliers.

Working Capital Management

Short-term assets refer to the assets that are expected to be converted into cash within a year or less. These assets are also called current assets as they are expected to be liquidated within a short period. Inventory is a form of short-term asset that represents the goods or raw materials that a company has on hand that are yet to be sold. As inventory is expected to be sold within a year, it qualifies as a short-term asset.

On the other hand, short-term liabilities refer to the obligations or debts that a company needs to pay within a year. These liabilities are known as current liabilities. Money owed to suppliers is a common form of short-term liability that represents the amount a firm owes to its suppliers for goods or services that have been purchased on credit. As this amount is expected to be cleared within a year, it qualifies as a short-term liability.

In summary, a firm’s short-term assets such as inventory and short-term liabilities such as money owed to suppliers are crucial components of the working capital of a company. Effective management of these assets and liabilities is important to ensure that the firm has sufficient liquidity to meet its short-term obligations and maintain its smooth operation.

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