Quick ratio – sometimes called the quick assets ratio or the acid-test-serves as an indicator of a company’s short-term liquidity, or its ability to meet its short-term obligations. In other words, it tests how much the company has in assets to pay off all of its liabilities.
It measures the availability of assets which can quickly be converted into cash to cover current liabilities. It basically measures a company’s ability to meet these liabilities without needing to sell inventory. In other words, to meet liabilities, cash or quick assets can be sold off quickly if needed.
Excluded from this calculation is Inventory and other less liquid current assets.
A quick ratio of 1.00 or more is considered ‘safe’.
Quick Ratio = (Cash & Money At Bank(s) + Accounts Receivable) / Total Current Liabilities
You should consider your results within the context of a company’s specific industry and its group of competitors.
If the company’s Ratio was less than 1.00, then the firm would have to sell inventory to raise some cash to meet its obligations
A ratio greater than 1.00 puts the company in a better position than a result less than 1.00 with regard to maintaining liquidity and not having to depend on selling inventory to pay its liabilities.
It goes without saying you need to keep your ratio above the target. It’s not always that easy but maintaining a result near 1.00 if not above can be done by by managing debtors and keeping an eye on liabilities.
I encourage you to create a report or a dashboard that gives you all your figures whenever you need them. If you don’t have the time or resources to make that happen then sign up for Blue Bean today and you’ll see your metrics within a few minutes.
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