What is 'Short Term'

Short term is a concept that refers to holding an asset for a year or less, and accountants use the term “current” to refer to an asset expected to be converted into cash in the next year or a liability coming due in the next year. The accounting profession uses current assets and current liabilities to perform analysis, and in the investing industry, a security with a holding period of one year or less is a short-term security.

BREAKING DOWN 'Short Term'

Accountants define short term as current, so a current asset equals cash or an asset that will be converted into cash within a year. Inventory, for example, is converted into cash when items are sold to customers, and accounts receivable balances are converted into cash when a client pays an invoice. Both accounts receivable and inventory balances are current assets.

Factoring in Liquidity

Liquidity is a company’s ability to collect enough short-term assets to pay short-term liabilities as they come due. A business must be able to sell a product or service and collect cash fast enough to finance company operations. Managers must focus on liquidity as well as solvency, which is the process of generating sufficient cash flow to purchase assets over the long term.

Examples of Short-Term Financial Ratios

Managers make decisions with financial ratios, and there are several keys ratios used to make decisions about liquidity. The current ratio, for example, is stated as current assets divided by current liabilities, and the ratio measures the ability of a firm to pay its liabilities in the short term. Companies also use turnover ratios to calculate how quickly current assets can be converted into cash in the short term. As an example, the inventory turnover ratio compares the cost of sales with inventory to measure how often the business sells its entire inventory in a year. Businesses also use the accounts receivable turnover ratio to analyze the number of days it takes to collect the average accounts receivable balance. If managers can effectively monitor short-term cash flow, the firm needs less cash to operate each month.

How Short-Term Periods Impact Taxes

Investors need to be clear about whether a capital gain is short term or long term, because taxation of the gain or loss is treated differently. For tax purposes, a long-term gain or loss means the security is held for a year or more, and long-term trading activity is separated from short-term transactions.

RELATED TERMS
  1. Activity Ratios

    Accounting ratios that measure a firm's ability to convert different ...
  2. Marketable Securities

    Marketable securities are liquid financial instruments that can ...
  3. Current Liabilities

    A company's debts or obligations that are due within one year. ...
  4. Liquidity

    Liquidity is the degree to which an asset or security can be ...
  5. Working Capital

    Working capital, also known as net working capital is a measure ...
  6. Liability

    Liabilities are defined as a company's legal debts or obligations ...
Related Articles
  1. Investing

    Reading the Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  2. Investing

    Measuring Company Efficiency

    Three useful indicators for measuring a retail company's efficiency are its inventory turnaround times, its receivables and its collection period.
  3. Investing

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  4. Investing

    Why Cash Management Is Key To Business Success

    Businesses need to generate a healthy cash flow to survive, but not hold too much so that inventory suffers or investment opportunities are missed.
  5. Personal Finance

    How To Improve Net Worth By Decreasing Liabilities

    Here's an analysis of how to adjust liabilities and assets to improve net worth.
  6. Investing

    Working Capital Position

    Learn how to determine a company's working capital position to correctly analyze liquidity.
  7. Investing

    Debt Ratios

    Learn about the debt ratio, debt-equity ratio, capitalization ratio, interest coverage ratio and the cash flow to debt ratio.
  8. Investing

    Reviewing Assets On The Balance Sheet

    A firm uses its assets to generate sales and bottom-line profits for shareholders. A healthy company will continually grow its assets, which stems from leftover profits that are reinvested back ...
RELATED FAQS
  1. How do you calculate working capital?

    The formula for calculating working capital is straightforward, but lends great insight into the short-term financial health ... Read Answer >>
  2. What are the main differences between the current ratio and the quick ratio?

    Find out how the quick ratio and the current ratio can offer different views on a company's ability to pay off liabilities. Read Answer >>
  3. What is the formula for calculating the current ratio?

    Find out what makes up the current ratio, how to calculate it, and what the result can tell you about a potential investment. Read Answer >>
  4. How can a company quickly increase its liquidity ratio?

    Discover what high and low values in the liquidity ratio mean and what steps companies can take to improve liquidity ratios ... Read Answer >>
  5. What are the differences between solvency ratios and liquidity ratios?

    Learn about liquidity ratios and solvency ratios, some examples of these ratios and the main difference between them. Read Answer >>
  6. What do efficiency ratios measure?

    Learn about efficiency ratios, what they measure, how to calculate commonly used efficiency ratios and how to interpret these ... Read Answer >>
Hot Definitions
  1. Treasury Yield

    Treasury yield is the return on investment, expressed as a percentage, on the U.S. government's debt obligations.
  2. Return on Assets - ROA

    Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets.
  3. Fibonacci Retracement

    A term used in technical analysis that refers to areas of support (price stops going lower) or resistance (price stops going ...
  4. Ethereum

    Ethereum is a decentralized software platform that enables SmartContracts and Distributed Applications (ĐApps) to be built ...
  5. Cryptocurrency

    A digital or virtual currency that uses cryptography for security. A cryptocurrency is difficult to counterfeit because of ...
  6. Financial Industry Regulatory Authority - FINRA

    A regulatory body created after the merger of the National Association of Securities Dealers and the New York Stock Exchange's ...
Trading Center