Quick Ratio
Last reviewed 2026-05-11 by Asad Ali, Founder & CEO
A liquidity measure of quick assets divided by current liabilities.
The quick ratio (also called the acid-test ratio) measures a business's ability to meet short-term obligations using only its most liquid assets — cash, marketable securities, and accounts receivable — excluding inventory and prepaid expenses, which are slower or impossible to convert to cash without loss. A ratio above 1.0 means the business can cover its current liabilities without selling inventory; a ratio below 1.0 means the business depends on inventory turnover or new financing to pay near-term bills. It is a stricter test of liquidity than the current ratio and is particularly important for businesses holding slow-moving or seasonal inventory (apparel, furniture, specialty equipment) where inventory cannot be sold quickly at face value.
Formula
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) ÷ Current LiabilitiesExample
A retailer has $20,000 cash, $15,000 in accounts receivable, $50,000 in inventory, $5,000 in prepaid insurance, and $40,000 in current liabilities. Quick Ratio = ($20,000 + $15,000) ÷ $40,000 = 0.875. By comparison, the Current Ratio = ($20,000 + $15,000 + $50,000 + $5,000) ÷ $40,000 = 2.25. The current ratio looks healthy, but the quick ratio reveals that without successfully selling inventory, the business cannot cover its short-term bills — a real risk during a slow season.
Why It Matters for Your Business
The quick ratio reveals whether you can pay bills even if inventory doesn't sell, making it a more conservative and reliable liquidity test than the current ratio.
Practical Tips
- •Track quick ratio monthly alongside current ratio — if they diverge significantly, your liquidity depends on inventory, which is dangerous in a downturn
- •Target a quick ratio of at least 1.0 for most service businesses and 0.5+ for inventory-heavy businesses
- •When the quick ratio drops, prioritize AR collection before inventory liquidation — receivables turn to cash faster and at full value
- •Lenders use the quick ratio to set covenants on lines of credit — review your loan documents to see if a minimum is required
Common Questions About Quick Ratio
How is quick ratio calculated?
The formula is: Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) ÷ Current Liabilities. See the worked example below for a step-by-step calculation using realistic numbers.
What is an example of quick ratio?
A retailer has $20,000 cash, $15,000 in accounts receivable, $50,000 in inventory, $5,000 in prepaid insurance, and $40,000 in current liabilities. Quick Ratio = ($20,000 + $15,000) ÷ $40,000 = 0.875. By comparison, the Current Ratio = ($20,000 + $15,000 + $50,000 + $5,000) ÷ $40,000 = 2.25. The current ratio looks healthy, but the quick ratio reveals that without successfully selling inventory, the business cannot cover its short-term bills — a real risk during a slow season.
Why does quick ratio matter for my business?
The quick ratio reveals whether you can pay bills even if inventory doesn't sell, making it a more conservative and reliable liquidity test than the current ratio.
How does FiscalInsights help with quick ratio?
FiscalInsights tracks quick ratio automatically as part of its AI bookkeeping workflow. Connect your bank accounts and the platform handles categorization, reconciliation, and reporting without manual entry.
More Business Terms
Accounts Reconciliation
Ensuring account balances match between different records.
Break-Even Point
The sales volume at which total revenue exactly equals total costs — neither profit nor loss.
Financial Statements
Reports summarizing financial performance and position.
Fixed Costs
Expenses that remain constant regardless of production.
Variable Costs
Expenses that change with production or sales volume.
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