What Are Spontaneous Assets?
Spontaneous assets are balance sheet items that typically grow in proportion to sales such as accounts receivable or inventory. Spontaneous assets are accumulated automatically as a result of a company’s day-to-day business activity, and often are included as a firm's current assets on the balance sheet.
However, fixed assets, such as a factory building or equipment often do not rise and fall with sales volumes, and therefore are not booked as spontaneous assets.
- Spontaneous assets are those accumulated as a result of the company's day-to-day business operations.
- An increase in spontaneous assets is normally tied to an decrease in a company's cost of goods sold or an increase in revenues.
- Spontaneous assets often include accounts receivables, inventories, and working capital.
Understanding Spontaneous Assets
The projected growth in spontaneous assets is an important measure for firms to consider as they evaluate the need to borrow. If the cash coming into the company is enough to cover operating costs, the business has a lower cost of financing, or borrowing cash to cover costs.
Similar to spontaneous assets, spontaneous liabilities move with changes in sales. Spontaneous liabilities are obligations of a company that are accumulated automatically as a result of the firm's day-to-day business. An increase in spontaneous liabilities is normally tied to an increase in cost of goods sold (COGS, or cost of sales), which in turn depends on sales volume of goods or services.
Working capital, or current assets less current liabilities, is critical funding ongoing operations of a firm. If current assets such as cash, accounts receivable and inventory do not exceed current liabilities, a company may struggle to meet its spontaneous liabilities.
Why Spontaneous Assets Are Important
The projected growth or decline in spontaneous assets is an important component for firms to consider as they manage corresponding accounts on the other side of the balance sheet—spontaneous liabilities, which are typically recorded on a balance sheet under current liabilities Current liabilities are short-term obligations such as accounts payable (AP) and money owed to vendors or service providers.
Working capital (or current assets minus current liabilities) is a key part of funding ongoing operations of a firm. If the major components of current assets such as cash, accounts receivable, and inventory do not consistently and comfortably exceed current liabilities, then a company may eventually find itself in a challenging financial situation to meet its spontaneous liabilities.
Example of Spontaneous Assets
For example, orders for widgets result in the manufacture of more widgets that become sales inventory. Sales of goods also result in accounts receivable (AR) and deposits to company bank accounts as cash assets. These items can be considered spontaneous assets as the grow along with usual business activities.