Current Assets

Now let's examine reducing Current Assets. Consider these cases:

Sales	$100,000
CASE 1
ASSETS ($000)				LIABILITIES & OWNER'S EQUITY
Current Assets				Liabilities
Cash	$6,500			Accts Payable		$6,000
Accts Receivable	$7,000			Current Debt		$4,000
Inventories	$6,500			small;">Current Liabilities			$10,000
Current Assets		$20,000
Current Ratio	2.0			Days of Working Capital			36.5
CASE 2
ASSETS ($000)				LIABILITIES & OWNER'S EQUITY
Current Assets				Liabilities
Cash	$2,500			Accts Payable		$6,000
Accts Receivable	$7,000			Current Debt		$0
Inventories	$2,500			Current Liabilities			$6,000
Current Assets		$12,000
Current Ratio	2.0			Days of Working Capital			21.9

Case 1 and 2 both have Current Ratios of 2.0, but Case 2 is much more worrisome. If demand increases, you stock out after selling only $2.5 million of inventory. If demand falls, you run out of cash after building only $2.5 million of additional inventory. You have little room for error.