Quick Ratio Explained: Can Your Business Cover Its Bills Without Selling Inventory?

Getting ready to apply for a commercial loan, but not sure if your financials will receive an approval from the bank? This post continues our series explaining financial equations and ratios so that you feel more prepared when you talk to the bank about your loan request. Next up: the Quick Ratio.

What Is the Quick Ratio?

The Quick Ratio measures the liquid assets a company has to repay its current liabilities, like debt repayments and Accounts Payable. Liquid assets are the cash and Accounts Receivable a company owns (some companies may even have short-term investments that should be added to the equation). Compared to the Current Ratio, the Quick Ratio measures a company's ability to repay its current liabilities without relying on things like sold inventory to pay back its creditors. Here's how you can calculate it:

Why Is the Quick Ratio Important?

The Quick Ratio is important to track so you know how much cash and expected incoming cash you have to pay back your bills, trade credit, and loans. At a minimum, a business should always look to maintain a 1:1 Quick Ratio, meaning it has the same amount of cash and accounts receivable as it does current liabilities. The higher the Quick Ratio, the more cash a business will have left over after paying back its liabilities. As long as a company isn't restraining its growth or asset investment by holding too much cash, businesses should look to operate with a higher Quick Ratio.

Example of the Quick Ratio

ABC Company has cash reported on its Balance Sheet of $50,000 and an Accounts Receivable balance of $100,000. Its total Current Liabilities owed is $75,000. Its Quick Ratio would be: