Avail 20% discount on updated CA lectures for Dec 21 .Use Code RESULT20 !! Call : 088803-20003


Share on Facebook

Share on Twitter

Share on LinkedIn

Share on Email

Share More

Current Ratio is the function of Current Assets and Current Liabilities. Hence the simple understanding is either increase the Current assets or reduce the Current Liabilities. Neither ways are easier since both are related to Business dynamics. An attempt to increase/reduce one short term account will affect the other; as a result altering the ratio is not possible.
Yet, we can accomplish this by (other than changing the complexion of Business or gearing) keeping in mind the following
·         Short term payables relating to Fixed Assets can still be reckoned as Long term payable for CMA (Credit Monitoring and Assessment) Projection to Bank. This is possible in a case where there are payables to a Parent Company abroad and getting a concession can be implied.
·         On the contrary, an advance payment to a supplier of Capital Goods can be still classified as a Trade Advance. Practically, in many case it may be on Cash and Carry basis.
·         If there is an Interest free payable, better not to avail any short term credit and thereby postpone the payment, if possible. This is because, the interest portion will get added to Current Liability and reduce the Current Ratio to that extent. Beware; this is only under comfortable business conditions.
·         Similarly, if there is too much surplus at Bank which does not earn interest, it can be invested in interest accruing deposits.
·         If Local currency is forecasted to depreciate, then foreign currency payables can be repaid with surplus cash available. This is because of the requirement to restate the monetary items at the closing exchange rate as per AS-11. We can forecast this by referring the Forward rates available in the market. Again, if this Short term foreign currency payable cannot be settled immediately, but there are export receivables in the same currency, let the exchange risk get eliminated through offsetting.
·         Please note that as per our AS-16 on borrowing costs, we are allowed to capitalise the interest cost such that even an asset such as Inventory can be a Qualifying asset when it consumes substantial time to be ready for operation. By this we can mitigate the negative effect of only an increase in current liability without increase in Current asset.
·         Service tax on Royalty payable under the Technical agreement can be taken credit of even if the Royalty has not been paid (Recent CBEC circular). Thus Service tax is now an addition to the Working capital.
·         Service tax on Goods Transport Agency services which were previously ‘Output services’ (liability) for the service recipient have now clearly become an Input service (Asset) which can be taken credit of. We can account this as Current Asset.
·         Try to convert old Inventories to cash to the maximum extent possible just to avoid unnecessary write off to P&L a/c.
·         Ensure proper accounting of CENVAT credit as per the relevant ICAI Guidance note.
·         Better not to resort to any factoring/discounting at times close to CR evaluation if possible in case of export receivables, because the cash receipt will be lesser and the difference will be accounted as Discount expenses. Again this should not be at the cost of a financial crunch.
·         Current Ratio can be improvised by Securitisation where irrecoverable/illiquid assets are transferred to a Special Purpose Vehicle for cash. This facility is of course not possible for all corporate.
·         Finally, Debt restructuring wherever possible. This is a phenomenon.
Currently most nationalised banks call for a ration of 1.33:1.
All the above ways will be effective when they can affect the Balance sheet cumulatively and provided, the other main factor namely Sales are adequate. But, for a drastic improvement in the current Ratio, the sales have to flourish and more capital injection also has to take place.
"Loved reading this piece by CA S.SAIRAM?
Join CAclubindia's network for Daily Articles, News Updates, Forum Threads, Judgments, Courses for CA/CS/CMA, Professional Courses and MUCH MORE!"

Category Others, Other Articles by - CA S.SAIRAM