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Quick Ratio

 

Retirement Business Quick Ratio (Acid Test) Calculator

[CP_CALCULATED_FIELDS id=”7″] Quick Ratio Details
Calculation

The basic calculation of the Quick Ratio is to add Cash plus Marketable Securities plus Accounts Receivable and divide the sum by Current Liabilities.

Basic formula

Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current liabilities.

Note that Inventory is excluded from the sum of assets in the Quick Ratio, but included in the Current Ratio. Ratios are tests of viability for business entities but do not give a complete picture of the business’ health. If a business has large amounts in Accounts Receivable which are due for payment after a long period (say 120 days), and essential business expenses and Accounts Payable due for immediate payment, the Quick Ratio may look healthy when the business is actually about to run out of cash. In contrast, if the business has negotiated fast payment or cash from customers, and long terms from suppliers, it may have a very low Quick Ratio and yet be very healthy.

Interpretation

The actual ratio has limited usefulness without comparing it with your trend and industry competitors. A lower trending quick ratio means your company’s ability to cover its short-term debts is getting worse and action to improve liquidity is necessary. Comparing your quick ratio to industry standards is especially important since quick ratio standards vary significantly by industry. If you have a quick ratio of 2 and all of your competitors have a ratio of 4, you have a competitive disadvantage.

Adjustments

If you do have a lower quick ratio than industry standard, you need to either increase current assets or reduce current liabilities. Making your short-term liability payments helps reduce the current liability amount. Generating more cash flow is one of the best ways to improve the top part of your quick ratio because cash is the most liquid current asset you have.


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