The quick ratio (also known as the acid-test ratio) is a financial metric used to evaluate a company's short-term liquidity—specifically, its ability to meet short-term obligations using its most liquid assets.
How to Calculate the Quick Ratio
Quick Ratio = ("Cash and Cash Equivalents" +"Marketable Securities" +"Accounts Receivable" ) / "Current Liabilities"
Or more simply:
"Quick Ratio" = "Quick Assets" / "Current Liabilities"
Quick assets exclude inventory and prepaid expenses because they may not be easily converted to cash within a short period.
What the Quick Ratio Shows
A ratio > 1 means the company can cover its current liabilities without selling inventory.
A ratio < 1 suggests potential liquidity issues—it may struggle to pay short-term debts without relying on inventory or other less liquid assets.
It’s a more conservative measure than the current ratio, which includes inventory.
How to Improve Your Quick Ratio:
- Increase Cash Reserves
- Improve cash flow management.
- Reduce unnecessary expenses.
- Delay non-essential capital expenditures.
- Speed Up Accounts Receivable.
- Offer early payment discounts.
- Tighten credit policies.
- Follow up promptly on overdue invoices.
- Reduce Current Liabilities.
- Refinance short-term debt into long-term debt.
- Negotiate better payment terms with suppliers.
- Sell Marketable Securities.
- Convert investments into cash if needed for liquidity.
- Avoid Overreliance on Inventory.
- Inventory is excluded from the quick ratio, so improving inventory turnover won’t directly help—but reducing excess inventory can free up cash.
- Keep your Work in Progress low.
If you would like to discuss further, please contact us:
McNamara & Company - Chartered Accountants, located minutes from the Melbourne CBD
www.mcnamaraandco.au/contact-us
Phone +61 3 9428 1062
Email admin@mcnamaraandco.au
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