Quick Ratio: What It Is & How To Calculate It

quick ratio

Prepaid expenses are also not a part of this quick ratio calculation since it is not a liquid asset that can be used. Here the Quick assets mean the Current assets minus all the inventories and minus all the prepaid expenses because only cash or near to cash assets are considered. Many of these strategies focus on increasing the value of your current assets and decreasing your current liabilities.

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In other words, a company shouldn’t incur a lot of cost and time to liquidate the asset. For this reason, inventory is excluded in quick assets because it takes time to convert into cash. A high quick ratio means a company can raise enough money to pay off its short-term obligations by selling assets. The quick ratio is thus considered to be more conservative than the current ratio since its calculation intentionally ignores more illiquid items like inventory. The quick ratio is also known as the acid test ratio, a reference to the fact that it’s used to measure the financial strength of a business.

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If you’re looking for accounting software to help prepare your financial statements, be sure to check out The Ascent’s accounting software reviews. You must calculate the quick ratio and analyze the ratio trend to judge the company’s short-term liquidity and solvency. A company with a quick ratio of 1 and above has enough liquid assets to fully cover its debts.

The following figures are as of March 27th, 2021, and come from Apple’s balance sheet. This moniker refers to a quick and simple test gold miners used to use to determine whether samples of metal were true gold or not. Acid would be added to a sample; if the sample began to dissolve, it wasn’t gold.

What Is A Healthy Current Ratio? Quick Ratio?

The quick ratio assumes that all current liabilities have a near-term due date. Total current liabilities are often calculated as the sum of various accounts including accounts payable, wages payable, current portions of long-term debt, and taxes payable. The quick ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets. The quick ratio is an indicator that measures a company’s ability to meet its short-term financial obligations. It can help reassure creditors and therefore interest rates they may charge could be lower compared to other companies with lower ratios. For example, say that a company has cash and cash equivalents of $5 million, marketable securities worth $3 million, and another $2 million in accounts receivable for a total of $10 million in highly liquid assets. The quick ratio compares the total amount of cash and cash equivalents + marketable securities + accounts receivable to the amount of current liabilities.

quick ratio

The provides a simple way of evaluating whether a company can cover its short-term liabilities very quickly. This is important for a business because creditors, suppliers, and trade partners expect to be paid on time.

Quick Ratio Template

The numbers in this formula come straight from your balance sheet, where the assets are listed from top to bottom in order of how easily liquidated that asset is. For example, cash will be at the top, followed by outstanding invoices, and finally property and other fixed assets at the bottom. Here’s everything you need to know about the current ratio and its calculation. If the value of quick assets is not directly available, you can always calculate it yourself from the data available on the balance sheet. A company with a higher quick ratio is considered to be more financially stable than those with a lower quick ratio. Having a healthy quick ratio is important for companies and their creditors, lenders, investors, and other stakeholders. Businesses should always work to keep their quick ratio managed properly.

  • The following figures are as of March 27th, 2021, and come from Apple’s balance sheet.
  • She currently writes about insurance, banking, real estate, mortgages, credit cards, loans, and more.
  • During hard times, a business’s ability to leverage its cash and other short-term assets can be key to survival.
  • According to Apple’s quick ratio—the more conservative measure—it didn’t have quite enough liquidity to cover its upcoming liabilities.

After closing the parenthesis, add the ‘/‘ sign and click on the cell with the value for total current liabilities. The quick ratio helps to make the management realize the assets which can be used to quickly pay off the liabilities. Factoring companies purchase your outstanding receivables at a reasonable percentage (usually 15% of the invoice). The benefit is that the company assumes responsibility for pursuing funds from slow-paying customers. With inventory excluded, the quick ratio offers an accurate picture of the business as it exists.

While the high inventory balance and growth benefit the current ratio, the quick ratio excludes illiquid current assets such as inventory. The gap between the current ratio and quick ratio stems from the inventory line item, which comprises a significant portion of the total current assets balance. In Year 1, the quick ratio can be calculated by dividing the sum of the liquid assets ($20m Cash + $15m Marketable Securities + $25m A/R) by the current liabilities ($150m Total Current Liabilities). Accounting software helps a company better determine its liquidity position by automating key functionality that helps monitor your business’s financial health. Another limitation of the quick ratio is that it doesn’t consider other factors that affect a company’s liquidity, such as payment terms and existing credit facilities. As a result, the quick ratio does not provide a complete picture of liquidity. Experts recommend using it in conjunction with other metrics, such as the cash ratio and the current ratio.

You also know how to add the formula directly in your spreadsheet and customize Layer’s Balance Sheet Template to include this ratio. Audit your current assets (fixed assets, securities, etc.) and look for opportunities to turn underperforming, marketable securities back into cash. Streamlining the financial accounting process gets invoices out the door more quickly to balance your accounts receivable and accounts payable. If your accounting cycle is slow, upgrading your process results in faster processing and, therefore, earlier payment.

Conclusion: the quick ratio vs. the current ratio

The higher your quick ratio, the better your business will be able to meet any short-term financial obligations. A quick ratio of 1 means that for every $1 in current liabilities, you have $1 in current assets.

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