What is a 'Permanent Current Asset'

A permanent current asset is the minimum amount of current assets a company needs to continue operations. Inventory, cash and accounts receivable fall under the category of current assets, and the base amounts of these assets that need to be carried to sustain ongoing business are considered "permanent."

BREAKING DOWN 'Permanent Current Asset'

A company will divide current assets into permanent and temporary types. This nomenclature, however, does not apply in the financial statements. The balance sheet does not distinguish between the two types; instead, management internally monitors baseline current asset amounts and the excess over those amounts, also known as fluctuating current assets. Temporary current assets rise seasonal, during the year-end holidays, for instance, or if the pace of business activity suddenly picks up for any reason. Additional sales will result in increases in accounts receivable, inventory and cash above and beyond the permanent state of current assets.

Since firms regard permanent current assets more in the category of "fixed" or long-term, even though not technically, they usually finance them with long-term debt. The payment of short-term debt that becomes due within one year may be disruptive to the maintenance of baseline current assets. Moreover, should interest rates rise and a company must refinance short-term debt, it will face higher interest expenses. Managers, therefore, prefer to install long-term financing for the portion of current assets that they believe is necessary to sustain operations; they want the predictability. The downside is the possibility that some of the long-term debt will not be utilized from time to time, resulting in higher-than-necessary interest expense, but this is normally an acceptable trade-off.

Permanent Current Asset Illustration

A department store carries $90 million of cash, $400 million of inventory and $50 million of accounts receivable from approximately January to July. These are permanent current asset amounts. From August to December, to accommodate back-to-school demand and to prepare for the Christmas holidays, the department store ramps up inventory levels to $900 million. Cash and accounts receivable rise as well but not proportionately. These additional amounts are booked internally as temporary current assets.

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RELATED FAQS
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