What it is: Like the current ratio, the quick ratio (also sometimes called the acid test ratio) measures a business' liquidity. However, many financial planners consider it a tougher measure than the current ratio because it excludes inventories when counting assets. It calculates a business' liquid assets in relation to its liabilities. The higher the ratio is, the higher your business' level of liquidity, which usually corresponds to its financial health. The optimal quick ratio is 1 or higher.
When to use it:This is an important planning tool, especially for businesses that can tie up a lot of assets in inventory. By tracking it monthly, you can keep an eye out for negative trends that could hamper your business' ability to meet its obligations. You can also use the quick ratio to evaluate the financial health of potential customers, since it also indicates whether a business can pay off its debts quickly. A firm with a low quick ratio may be more likely to delay payments because its assets are tied up elsewhere.
Tip: Take control of your business spending by using charge cards which require you to pay your balance in full each month
The formula: (Current assets less inventories) divided by current liabilities.
When to use it:This is an important planning tool, especially for businesses that can tie up a lot of assets in inventory. By tracking it monthly, you can keep an eye out for negative trends that could hamper your business' ability to meet its obligations. You can also use the quick ratio to evaluate the financial health of potential customers, since it also indicates whether a business can pay off its debts quickly. A firm with a low quick ratio may be more likely to delay payments because its assets are tied up elsewhere.
Tip: Take control of your business spending by using charge cards which require you to pay your balance in full each month
The formula: (Current assets less inventories) divided by current liabilities.
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