Current Ratio

It is probably the best known and most often used of the liquidity ratios. Analysts and investors use it to evaluate the business’s ability to pay its short-term debt obligations. These include accounts payable (payments to suppliers) and taxes and wages. It compares all of a company’s current assets to its current liabilities. It’s usually defined as assets that are cash or will be turned into cash in a year or less, and liabilities that will be paid in a year or less.

Current Ratio Definition

A measure of liquidity. This measure compares the totals of the current assets and current liabilities. The higher the ratio, the greater the ‘cushion’ between current obligations and the business’s ability to pay them.

The Target

A ratio of 2.00 or more is an indicator of good short-term financial strength. In other words, the current assets of the business should be at least double the current liabilities.

The Formula

Current Ratio = Current Assets / Current Liabilities

How to keep your Current Ratio above the target

A ratio of 2.00 is a good financial position for a business, meaning that it can meet its short-term debt obligations with no stress. If the ratio is less than 1.00, then the business would have a problem covering its monthly bills. A higher ratio is typically better with regard to maintaining liquidity.

In summary

It goes without saying you need to keep your current ratio above 2.  It’s not always that easy, but maintaining something close through carefully managing your current liabilities is a key action to help you not just survive but thrive.
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