What Are Permanent Current Assets and How Are They Funded?

Permanent current assets represent the minimum level of current assets a company requires to sustain its regular business operations over the long term. While classified as “current” on a balance sheet, meaning they are expected to convert to cash within a year, they function more like long-term assets. This core level of assets is not meant to be liquidated but is continuously replenished to support ongoing sales and production.

Core Components of Permanent Current Assets

The term “permanent current assets” is a financial management concept rather than a formal line item on a balance sheet. It is composed of the minimum levels of several key current asset accounts that are necessary for a company’s uninterrupted day-to-day functions.

A primary component is the minimum cash balance a company must keep on hand. It is the cash required for predictable, routine expenses such as meeting payroll, paying utility bills, and handling other immediate operational costs. Another part is the baseline level of accounts receivable. For a business with consistent sales, there will always be a certain amount of money owed by customers, representing a permanent investment in receivables.

A component for many businesses is a minimum level of inventory. This represents the safety or base stock needed to satisfy regular customer demand without delays. For example, a grocery store must always have a certain quantity of staples like milk, bread, and eggs on its shelves, regardless of the season, to prevent stockouts and lost sales.

Differentiating from Temporary Current Assets

To fully understand permanent current assets, it is useful to contrast them with temporary, or fluctuating, current assets. These are the additional current assets a business needs to support seasonal or cyclical peaks in activity. While permanent assets represent a stable floor, temporary assets are the variable amounts to handle surges in sales or production.

Consider a toy manufacturer as an example. The company maintains a baseline inventory of its most popular toys throughout the year, which constitutes its permanent current assets. Leading up to the holiday season, the company increases production and its inventory levels to meet the spike in demand. This additional inventory is a temporary current asset; it will be sold off during the peak season, and the inventory level will return to its permanent base afterward.

The level of permanent current assets tends to grow steadily as a company expands, while temporary current assets fluctuate with sales cycles. A business might experience a predictable surge in accounts receivable during a busy season or need extra cash to pay for additional temporary staff.

Financing Permanent Current Assets

The guiding concept is often referred to as the matching principle, or hedging approach, in financial management. This principle suggests that the maturity of a financing source should align with the lifespan of the asset being funded.

Since permanent current assets are a long-term feature of the business, they should be financed with long-term capital. This includes sources like long-term debt, such as bank loans or bonds, and equity financing. Using long-term funds provides a stable capital structure and avoids the risks associated with constantly having to refinance a core part of the company’s operational base.

This approach contrasts with the financing for temporary current assets. Those short-term needs are funded with short-term financing, such as lines of credit or trade credit. For instance, a business would draw on a short-term loan to build up seasonal inventory and then repay that loan as the inventory is sold. Attempting to fund permanent assets with short-term debt introduces risk, including exposure to interest rate swings and the possibility that the financing cannot be rolled over.