Current Liabilities Slide

Slide Showing Various Current Liabilities as Example

What are Current Liabilities?

Meaning:

Current liabilities are financial commitments that mature within an year. In other words they are short-term in nature. Creation of such commitments is natural in the process of conduct of business. A business that offers credit to its customers is also forced to buy its raw materials on credit.

Looking from the angle of financing or funding a business operation, current liabilities are a crucial source of funding the current assets.

Current liabilities are paid off out of trade collections – in other words by realizations of current assets like inventory and receivables.

Current liabilities are the second component in the calculation of the important liquidity ratio – current ratio – it forms the denominator of the formula.

Examples:

1. Trade or supplier or vendor payables
2. Short-term bank borrowings in the form of cash credits, bill discounting facilities, factoring arrangements, etc.
3. ‘I Owe You’ or IOUs
4. Tax dues

Significance:

It goes without saying that a business should possess adequate current assets, which can be quickly converted into cash, to be able to honor current liabilities on time. The recommended proportions being:

1. Total current assets shall be at least double the total current liabilities
2. Quick current assets namely cash, bank balances and receivables shall be at least equal to total current liabilities

Inability to meet current liabilities on time indicates lack of liquidity and an organization in such a condition is termed as sick.

Since current liabilities have a short maturity, they should not be used as source to fund long-term assets, say fixed assets. Such a misuse is called diversion of working capital that could result in the business becoming sick and therefore is viewed as a serious violation of financial norms by banks and financial institutions.

Current Assets Example Slide

Slide Depicts Various Current Assets as Example

How Can I Become a Millionaire Quickly?

Actual Question:

I am 22. What can I do to become a multi-millionaire in the next 25 years?

I am a realist. So I am very cautious when I buy something. I read annual reports of companies, look at financial statements and calculate my intrinsec value of stocks. I beated the market (no leverage) in 2 years of experience. But getting rich quick is a dream. Should I keep investing in stocks?

Answer:

Dear Friend!

I am extremely glad to know your approach a in investing so far. I am also glad to know that all this you have achieved at such an young age! But you say that getting rich quick had remained a dream. My friend, let me assure you that getting rich quick had remained a pipe dream for a vast number of people in the past and will remain so in the future also.

My guru Warren Buffett says, “Certain things take time in life, and you cannot do anything. You cannot get a child in one month by making nine women pregnant.”

Why is it so?

What actually creates lasting wealth is not the investing acumen - but simply time.

Graph Depicting the Miracle of Compounding

You can see how the line is climbing steeply after 30 years!

In reality, a very long time and the miracle of compounding are the vital ingredients behind immense riches and wealth.

Even Warren Buffett, one of the richest men in the world today could only build his immense wealth only over 35 years. Please see the following table which shows how investing humble sum of Rs.10,000 every month in stocks can produce immense success over a long time.

So my sincere advice to you, my young friend is that from your own words you are on the right track and doing extremely well. Just keep it up for the next 38 years and by 60 you must be an unimaginably rich and wealthy person.

Thank you,

Anand