Floating asset

Floating asset is an alternative term for current assets, referring to resources that a business expects to convert into cash or consume within one year or one operating cycle, whichever is longer ^[1]. These assets continually change in quantity and composition as the company conducts its normal operations. Cash flows in from sales and out for purchases; inventory is acquired, sold and replenished; receivables are created by credit sales and extinguished by customer payments. This constant circulation distinguishes floating assets from fixed assets which remain in the business for extended periods.

Terminology and usage

The term floating asset appears less frequently in modern accounting literature than current asset, though both describe the same category of resources ^[2]. Historical usage favored floating to emphasize the circulating nature of these items as opposed to fixed assets anchored in the business. British accounting practice traditionally employed the floating designation more extensively than American counterparts.

Related terms include circulating assets, quick assets and liquid assets, each with slightly different connotations. Circulating emphasizes the movement through the operating cycle. Quick assets exclude inventory, focusing on resources most readily convertible to cash. Liquid assets stress the ease of conversion regardless of operating cycle considerations.

Floating capital represents the funds invested in floating assets. Working capital, defined as current assets minus current liabilities, measures the net amount of floating capital available after accounting for short-term obligations. Adequate floating capital ensures a business can meet ongoing operational needs without liquidity difficulties ^[3].

Components of floating assets

Cash and cash equivalents

Cash constitutes the most liquid floating asset, immediately available for any purpose. Bank account balances, currency on hand and petty cash funds comprise the cash portion. Cash equivalents include highly liquid investments with original maturities of three months or less, such as treasury bills, commercial paper and money market funds ^[4]. These instruments can be converted to known amounts of cash with minimal risk of value change.

Businesses maintain cash balances to meet transaction needs, provide precautionary reserves against unexpected requirements and potentially exploit opportunities as they arise. Excessive cash holdings sacrifice returns available from productive investments while insufficient cash creates liquidity risk.

Accounts receivable

Accounts receivable represent amounts customers owe for goods or services purchased on credit. These claims against customers convert to cash when payment is received, typically within thirty to ninety days depending on credit terms offered ^[5]. Trade receivables from normal business operations constitute the primary component, though other receivables may arise from employee advances, tax refunds or miscellaneous transactions.

Not all receivables prove collectible. Companies establish allowances for doubtful accounts to recognize expected credit losses. The net realizable value reported on balance sheets reflects gross receivables reduced by this allowance. Managing receivables involves balancing sales growth from extending credit against collection risks and carrying costs.

Inventory

Inventory includes goods held for sale to customers and materials awaiting use in production. Merchandising companies carry finished goods ready for resale. Manufacturers maintain raw materials, work in process at various completion stages and finished goods awaiting shipment ^[6]. Service businesses typically hold minimal inventory though supplies and materials may qualify.

Inventory management balances availability against carrying costs. Insufficient stock risks lost sales when customer demand exceeds supply. Excessive inventory ties up capital, occupies space and risks obsolescence or deterioration. Companies apply various techniques including just-in-time systems, economic order quantity models and ABC analysis to optimize inventory levels.

Marketable securities

Short-term investments in readily tradeable securities qualify as floating assets when management intends to liquidate them within one year. Stocks, bonds and other securities that can be sold quickly on established markets provide higher returns than cash while maintaining reasonable liquidity ^[7]. Classification depends on management intent; the same security might be a floating asset or long-term investment depending on holding period expectations.

Market values fluctuate, introducing price risk absent from cash holdings. Companies must weigh additional returns against potential losses when deploying excess cash into securities. Accounting standards require certain marketable securities to be carried at fair value with changes flowing through earnings or comprehensive income.

Prepaid expenses

Prepaid expenses represent advance payments for goods or services to be received in future periods. Insurance premiums, rent deposits, subscription fees and similar items paid ahead of their consumption qualify ^[8]. Though not convertible to cash, these prepayments reduce future cash outlays that would otherwise be required.

Prepaid expenses are gradually recognized as expenses over the periods they benefit. A twelve-month insurance premium paid at inception is recorded as an asset then expensed at one-twelfth per month throughout the coverage period. The current portion expected to be consumed within one year appears among floating assets.

Distinction from fixed assets

Fixed assets serve businesses over multiple years without being intended for sale or conversion to cash in normal operations. Buildings, machinery, vehicles, furniture and similar long-lived items constitute fixed assets ^[9]. These resources enable productive activity rather than circulating through the operating cycle.

Floating assets constantly flow into and out of the business. A retailer purchases inventory, holds it briefly, sells it to customers, collects payment and uses the proceeds to purchase replacement inventory. This cycle repeats continuously. Fixed assets by contrast remain in place year after year, gradually wearing out through depreciation.

The balance between floating and fixed assets varies across industries. Capital-intensive manufacturing requires substantial fixed asset investment while trading companies emphasize inventory and receivables. Service businesses may have minimal tangible assets of either type.

Importance for financial analysis

Liquidity assessment

Floating assets provide the means to satisfy short-term obligations as they come due. Analysts evaluate liquidity by comparing floating assets to current liabilities through ratios such as current ratio and quick ratio ^[10]. A current ratio below one indicates current liabilities exceed current assets, suggesting potential difficulty meeting near-term obligations.

Quality of floating assets matters alongside quantity. Slow-moving inventory or disputed receivables may not convert to cash when needed despite appearing on the balance sheet. Analysis considers asset composition, aging and collectibility rather than accepting stated values uncritically.

Working capital management

Efficient management of floating assets affects profitability and risk. Reducing receivables collection periods accelerates cash flow. Minimizing inventory without sacrificing sales reduces carrying costs. Negotiating favorable payment terms from suppliers conserves cash ^[11]. These actions improve working capital efficiency measured by metrics including cash conversion cycle.

Aggressive working capital strategies minimize floating assets, reducing capital requirements and potentially boosting returns. Conservative approaches maintain larger cushions against disruption at the cost of lower capital efficiency. Optimal policies depend on industry characteristics, business volatility and risk tolerance.

Credit evaluation

Lenders and credit analysts examine floating assets when assessing borrower capacity to repay obligations. Loans secured by receivables or inventory derive protection from the liquidation value of these assets. Asset-based lending facilities size credit availability to collateral values, typically discounting receivables and inventory to account for collection and liquidation uncertainties ^[12].

The composition and trend of floating assets reveals information about business health. Growing receivables may indicate successful sales expansion or deteriorating collection experience. Rising inventory could reflect anticipated demand or accumulating obsolete stock. Analyst judgment interprets these signals in context.

Floating charge security

In secured lending, a floating charge provides creditor protection over a category of assets that change in composition over time ^[13]. Unlike a fixed charge attaching to specific identified property, a floating charge hovers over present and future assets of a defined class, typically inventory and receivables. The borrower retains freedom to sell these assets in ordinary course without lender consent.

Upon default or other crystallizing event, the floating charge fixes onto whatever assets exist at that moment, preventing further disposition without creditor approval. This security arrangement recognizes that businesses cannot grant fixed charges over inventory they must sell to generate revenue. Floating charges carry subordinate priority to fixed charges and certain statutory claims.

Valuation considerations

Proper valuation of floating assets affects financial statement accuracy and decision making ^[14]. Cash presents no valuation complexity but other components require judgment. Receivables must be evaluated for collectibility with appropriate allowances established. Inventory valuation methods including FIFO, LIFO and weighted average produce different results during changing prices.

Lower of cost or market rules require writing down inventory when market values fall below carrying amounts. Marketable securities may be marked to fair value with gains and losses recognized currently or deferred depending on classification. Prepaid expenses typically remain at cost pending amortization.

Impairment testing applies when circumstances indicate assets may not realize their recorded values. Prolonged customer financial difficulties, obsolete inventory, illiquid securities or canceled service contracts may trigger recognition of losses before normal realization.

Floating asset — recommended articles

Investment — Return on investment — Risk management — Financial planning — Decision making — Strategy

References

• Brealey R.A., Myers S.C., Allen F. (2020), Principles of Corporate Finance, 13th Edition, McGraw-Hill.
• Brigham E.F., Ehrhardt M.C. (2019), Financial Management: Theory & Practice, 16th Edition, Cengage Learning.
• Gibson C.H. (2012), Financial Reporting and Analysis, 13th Edition, South-Western.
• Kieso D.E., Weygandt J.J., Warfield T.D. (2019), Intermediate Accounting, 17th Edition, Wiley.
• Ross S.A., Westerfield R.W., Jordan B.D. (2018), Fundamentals of Corporate Finance, 12th Edition, McGraw-Hill.
• Sagner J.S. (2014), Working Capital Management: Applications and Case Studies, Wiley.
• Wild J.J., Shaw K.W., Chiappetta B. (2018), Fundamental Accounting Principles, 24th Edition, McGraw-Hill.

Footnotes

1. Kieso D.E., Weygandt J.J., Warfield T.D. (2019), pp. 178-185
2. Gibson C.H. (2012), pp. 145-152
3. Sagner J.S. (2014), pp. 12-24
4. Wild J.J., Shaw K.W., Chiappetta B. (2018), pp. 289-296
5. Brigham E.F., Ehrhardt M.C. (2019), pp. 567-578
6. Kieso D.E., Weygandt J.J., Warfield T.D. (2019), pp. 412-425
7. Ross S.A., Westerfield R.W., Jordan B.D. (2018), pp. 234-245
8. Wild J.J., Shaw K.W., Chiappetta B. (2018), pp. 112-118
9. Brealey R.A., Myers S.C., Allen F. (2020), pp. 789-802
10. Gibson C.H. (2012), pp. 212-228
11. Sagner J.S. (2014), pp. 67-85
12. Brigham E.F., Ehrhardt M.C. (2019), pp. 612-628
13. Ross S.A., Westerfield R.W., Jordan B.D. (2018), pp. 512-526
14. Kieso D.E., Weygandt J.J., Warfield T.D. (2019), pp. 356-370

Author: Sławomir Wawak