Updated 13 November 2023
- The quick ratio indicates how effectively a company can meet its current liabilities.
- The formula is simple: Quick ratio = (Current assets - Current inventory) / Current liabilities
- A 1.50 : 1 quick ratio, also know as 1.5, means that a company has $1.50 of (liquid) current assets to cover ever $1 of its current liabilities.
Quick Ratio Calculator Instructions:
- You'll need your latest set of financials, or you can access your current assets total, inventory total and current liabilities total figures from your online accounting software (i.e. XERO or MYOB).
- Make sure you use the totals, not sub-totals.
- Current assets used in the quick ratio include cash, accounts receivable and cash-based investments but exclude inventory.
- Current liabilities used in the quick ratio include all short-term debt (overdrafts, short-term loans), accounts payable, accrued liabilities (and other provisions) and other immediate debts
- To calculate the quick ratio in seconds, you can subtract inventory and current prepaid assets from current assets, and divide that difference by current liabilities. For example, if the inventory was $50,000, current prepaid assets were $10,000, current assets were $120,000 and current liabilities were $40,000, the quick ratio would be $120,000 - ($50,000 + $10,000) / $40,000, which equals 1.50:1.
- Increase the time it takes to turnover inventory - the faster you sell stock, the higher your bank balance and therefore, the quick ratio will increase.
- Selling off unproductive assets - if the company has income-producing assets that aren't efficient or have stopped producing returns, it's better to sell them and use the cash in working capital.
- Get debtors to pay faster - our debtor guide details how to do this which improves bad debt collections and cash flow.
- Pay current liabilities - the less money you owe, the better the quick ratio. The more debt you can clear as it falls due, the better your business's financial position.
- Decrease drawings - these payments from the business always lower the amount of available cash. By reducing the amounts, there is more money to meet liabilities and increase the quick ratio.
The quick ratio is more conservative than the current ratio because, by excluding inventory, it only includes current assets that can be converted to cash in less than 90 days. Prepaid assets cannot pay liabilities, so they are excluded as well. While the current ratio indicates the immediate ability of a business to meet its debts, the quick ratio goes further by excluding any asset that can't be immediately converted into cash to pay debts.