Quick Ratios-Measuring Your Liquidity

Quick Ratios. The Quick Ratio is sometimes called the “acid-test” ratio and
is one of the best measures of liquidity. It is figured as shown below:

Quick Ratio = Cash + Government Securities
+ Receivables
—————————
Total Current Liabilities

The Quick Ratio is a much more exacting measure than the Current Ratio. By
excluding inventories, it concentrates on the really liquid assets, with
value that is fairly certain. It helps answer the question: “If all sales
revenues should disappear, could my business meet its current obligations
with the readily convertible `quick’ funds on hand?”
An acid-test of 1:1 is considered satisfactory unless the majority of your
“quick assets” are in accounts receivable, and the pattern of accounts
receivable collection lags behind the schedule for paying current
liabilities.

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