What is the quick ratio?

Published Monday 22 June 2026

Table of contents

• What is the quick ratio?
• How to calculate the quick ratio
• Components of the quick ratio
• What is a good quick ratio?
• What the quick ratio means for your business
• Quick ratio vs. current ratio
• How to improve your quick ratio
• Simplify your financial reporting with Xero
• FAQs on quick ratio

Key takeaways

• The quick ratio measures whether your business can cover its short-term debts using only its most liquid assets, such as cash, marketable securities, and accounts receivable.
• A quick ratio of 1.0 or above generally means you're in a healthy position to meet upcoming obligations. A ratio below 1.0 could signal a cash flow shortfall.
• Unlike the current ratio, the quick ratio excludes inventory and prepaid expenses, giving you a more conservative view of your liquidity.
• Regularly tracking your quick ratio helps you spot potential cash flow issues early and make more confident financial decisions.

What is the quick ratio?

The quick ratio is a financial metric that shows whether your business has enough liquid assets to pay off its current liabilities right now. It's one of the most widely used measures of short-term liquidity.

You might also hear it called the acid test ratio. The name comes from the idea that it only counts assets you can quickly convert to cash, typically within 90 days. That means it strips out slower-moving assets like inventory and prepaid expenses.

For small business owners, the quick ratio gives you a realistic snapshot of your ability to cover bills, loan repayments, and other short-term obligations without needing to sell stock or wait on longer-term assets to mature.

How to calculate the quick ratio

The quick ratio formula is straightforward. You divide your quick assets by your current liabilities to get a single number that represents your short-term financial position.

There are 2 common ways to write the formula:

Formula 1: Quick ratio = (cash + marketable securities + net accounts receivable) / current liabilities

Formula 2: Quick ratio = (current assets - inventory - prepaid expenses) / current liabilities

Both formulas give you the same result. The first adds up your liquid assets directly, while the second starts with total current assets and subtracts the items that aren't quickly convertible to cash.

Worked example

Suppose your business has the following on its balance sheet:

• Cash: $50,000
• Marketable securities: $10,000
• Net accounts receivable: $40,000
• Inventory: $30,000
• Current liabilities: $80,000

Using Formula 1: Quick ratio = ($50,000 + $10,000 + $40,000) / $80,000 = $100,000 / $80,000 = 1.25

A quick ratio of 1.25 means you have $1.25 in liquid assets for every $1 of short-term debt. That's a comfortable position, as you could cover all your current liabilities and still have a buffer.

Components of the quick ratio

Understanding what goes into the quick ratio helps you see exactly where your liquidity stands. The formula uses specific asset and liability categories from your balance sheet.

Assets included

The quick ratio only counts assets you can convert to cash within about 90 days. These are sometimes called quick assets or liquid assets.

• Cash and cash equivalents: money in your bank accounts, term deposits maturing within 3 months, and petty cash.
• Marketable securities: short-term investments you can sell on an exchange at any time, such as shares or government bonds.
• Net accounts receivable: money your customers owe you, minus any allowance for debts you don't expect to collect. Learn more about accounts receivable.

Liabilities included

Current liabilities are debts and obligations due within the next 12 months. These typically include:

• Accounts payable (bills you owe suppliers)
• Short-term loans and credit card balances
• Tax obligations due within the year
• Employee wages and superannuation payable
• The current portion of any long-term debt

What's excluded

The quick ratio deliberately leaves out assets that take longer to turn into cash. Inventory is excluded because selling stock can take weeks or months, and you may not get full value in a rushed sale. Prepaid expenses, such as insurance or rent paid in advance, are also excluded because they can't be converted back into cash.

What is a good quick ratio?

A quick ratio of 1.0 or above is generally considered healthy. It means you have at least $1 in liquid assets for every $1 of short-term debt, so you can meet your obligations without selling inventory or scrambling for funds.

Here's how to read different ranges:

• Above 1.0: your business can comfortably cover its short-term liabilities. A ratio between 1.0 and 1.5 is often seen as a solid position.
• Below 1.0: you may struggle to pay bills on time without selling inventory, taking on new debt, or finding another source of cash.
• Well above 2.0: while this signals strong liquidity, it could also mean you're holding too much cash that could be reinvested into growth.

Keep in mind that what counts as "good" varies by industry. A service-based business with minimal inventory might naturally have a higher quick ratio than a retail business that carries significant stock. It's most useful to track your ratio over time and compare it to businesses similar to yours.

What the quick ratio means for your business

Your quick ratio tells you whether you could pay all your short-term debts today using only your most accessible assets. It's a practical check on your business's financial resilience.

Lenders and investors often look at your quick ratio when deciding whether to extend credit or invest in your business. A ratio consistently above 1.0 signals that you manage cash well and aren't overly reliant on inventory sales to meet your obligations.

If your quick ratio drops below 1.0, it doesn't necessarily mean your business is in trouble; but it's a warning sign worth investigating. It could indicate that you're extending too much credit to customers, carrying excessive short-term debt, or not keeping enough cash reserves.

Monitoring this ratio regularly gives you early visibility into potential cash flow problems. You can then take corrective action, such as chasing overdue invoices or renegotiating payment terms with suppliers, before a shortfall becomes urgent.

Quick ratio vs. current ratio

The quick ratio and the current ratio both measure short-term liquidity, but they take different approaches to what counts as an available asset.

The current ratio includes all current assets in its calculation: cash, receivables, inventory, prepaid expenses, and anything else due within 12 months. Its formula is:

Current ratio = current assets / current liabilities

The quick ratio is more conservative. By stripping out inventory and prepaid expenses, it only counts assets you can realistically turn into cash within about 90 days.

This makes the quick ratio a stricter test of your ability to pay short-term debts. If you run a business with large amounts of inventory, the gap between your current ratio and quick ratio can be significant. A high current ratio paired with a low quick ratio suggests that much of your liquidity is tied up in stock.

In general, use the current ratio for a broad overview of short-term financial health, and the quick ratio when you want a more cautious assessment of whether you can cover your debts quickly. You can learn more about these and other measures in the guide to liquidity ratios.

How to improve your quick ratio

If your quick ratio is lower than you'd like, there are practical steps you can take to strengthen it. Most come down to increasing your liquid assets or reducing your short-term liabilities.

Speed up your receivables

The faster your customers pay, the more cash you have available. Send invoices promptly, set clear payment terms, and follow up on overdue accounts. Offering online payment options can also help reduce the time between invoicing and payment.

Reduce short-term liabilities

Look for opportunities to pay down short-term debt or renegotiate payment terms. Converting a short-term loan into a longer-term arrangement moves it out of your current liabilities, which improves your ratio.

Build your cash reserves

Setting aside a portion of your revenue into a dedicated savings or operating account gives you a buffer. Even small, consistent contributions add up over time and strengthen your liquidity position.

Manage inventory more efficiently

While inventory doesn't directly feature in the quick ratio, reducing excess stock frees up cash that would otherwise be tied up. Review your stock levels regularly and avoid over-ordering.

Monitor your ratio regularly

Don't wait for year-end to check your quick ratio. Reviewing it monthly or quarterly helps you spot trends early and adjust before a dip becomes a problem. Using real-time financial reports makes this much easier.

Simplify your financial reporting with Xero

Keeping track of your quick ratio is easier when your financial data is accurate and up to date. Xero's cloud accounting software gives you real-time visibility into your cash flow, receivables, and liabilities, so you can monitor liquidity ratios without manual calculations.

With features like automatic bank feeds, customisable reports, and a real-time dashboard, you can stay on top of where your business stands financially. You can pull up your balance sheet at any time to check the numbers that feed into your quick ratio. Get one month free.

FAQs on quick ratio

Here are some common questions about the quick ratio and how it applies to your business.

Why is it called the quick ratio?

It's called the quick ratio because it only includes assets you can convert to cash quickly, usually within 90 days. The alternate name, acid test ratio, comes from the historical practice of using acid to test whether metal was real gold; a fast, definitive test.

Is a higher quick ratio always better?

Not necessarily. While a ratio above 1.0 is healthy, a very high ratio (above 2.0 or 3.0) might mean you're holding too much idle cash. That money could potentially be reinvested into your business for growth.

What happens if a business has a quick ratio below 1?

A ratio below 1.0 means your liquid assets don't fully cover your short-term debts. You may need to sell inventory, secure additional financing, or take steps to collect outstanding invoices faster.

Who uses the quick ratio?

Business owners, accountants, lenders, and investors all use the quick ratio. Lenders often check it before approving loans, while business owners use it to monitor their financial position over time.

How does the quick ratio differ from the cash ratio?

The cash ratio is even more conservative than the quick ratio. It only counts cash and cash equivalents, excluding accounts receivable and marketable securities entirely. It answers the question: could you pay all your debts right now with just the cash you have on hand?