Quick ratio
Learn what the quick ratio is, how to calculate it, and what it shows about your short-term liquidity.
February 2024 | Published by Xero
Published Thursday 23 July 2026
Table of contents
Key takeaways
- The quick ratio, also called the acid test ratio, shows whether your business can cover its short-term debts using only its most liquid assets.
- You calculate it by dividing your quick assets by your current liabilities, and a result above 1.0 usually signals healthy short-term liquidity.
- The quick ratio is stricter than the current ratio because it leaves out inventory and prepaid expenses, which can be slow to turn into cash.
- You can strengthen your ratio by collecting receivables faster, trimming short-term debt, and building up your cash reserves.
What is the quick ratio?
The quick ratio, also known as the acid test ratio, measures whether your business can cover its short-term debts, roughly the next 3 months, using only its most liquid assets. It works much like the current ratio, but the current ratio takes a wider 12-month view.
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Quick ratio formula Version 1.
In accounting terms, the quick ratio checks if your short-term (or current) liabilities, the amounts you owe over the coming 3 months, can be paid from your liquid assets. Liquid assets are cash and anything you can turn into cash within about 3 months, so the ratio ignores holdings that are hard to sell quickly, such as inventory.
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Quick ratio formula Version 2.
Quick ratio formula
You can work out the quick ratio in 2 ways, and both give you the same answer. Pick whichever matches how your balance sheet is laid out.
- Version 1: (cash + cash equivalents + marketable securities + accounts receivable) ÷ current liabilities
- Version 2: (current assets − inventory − prepaid expenses) ÷ current liabilities
Here's a quick worked example. If your business holds $400,000 in quick assets and owes $200,000 in current liabilities, then $400,000 ÷ $200,000 gives a quick ratio of 2.0, which means you have twice the liquid assets needed to cover your short-term debts.
Liquid assets used in the quick ratio
Liquid assets are the resources you can quickly convert to cash to pay what you owe. These are the components you'll usually count toward the quick ratio:
- Cash: banknotes, coins, and bank account balances you can access quickly
- Cash equivalents: securities used for short-term investments, such as guaranteed investment certificates (GICs)
- Prepaid expenses: future costs paid ahead of time, such as rent and insurance
- Marketable securities: financial assets you can easily buy and sell on a public market, such as stocks and bonds
- Net accounts receivable: the total amount your customers owe your business
Keep in mind that prepaid expenses are typically excluded from the Version 2 calculation, since you can't spend them to settle a debt.
What a good quick ratio means
A quick ratio above 1.0 generally means your business can pay its short-term debts, while a ratio below 1.0 suggests you may fall short. So what is a good quick ratio? For most businesses, a result at or slightly above 1.0 is healthy, because it shows you can meet your obligations without selling off slower assets.
A high quick ratio can make your business look more attractive to investors and can sometimes earn you better interest rates from lenders. If it climbs too high, though, it may signal that you're holding idle cash rather than reinvesting it in growth.
If your quick ratio dips below 1.0, review your current assets, weigh the risk, and decide whether you hold enough liquid assets to stay comfortable. Ratios also vary by industry, so a retail store may run a low quick ratio because it depends heavily on inventory, which is why it's best to compare against other businesses in your field. For more context, our guide to liquidity ratios explains how these measures fit together.
How to improve your quick ratio
If your ratio is lower than you'd like, a few practical moves can lift it over time. Work through these steps to build a stronger short-term position:
- Collect your receivables faster by tightening payment terms and sending timely invoice reminders, so more money lands in your bank sooner.
- Reduce or renegotiate short-term liabilities by paying down debt or extending due dates, which lowers the amount you owe in the near term.
- Increase your liquid assets by building cash reserves and keeping funds in easy-to-access accounts rather than tied-up holdings.
- Improve inventory turnover so you sell stock quickly and free up cash, which also helps keep your broader cash flow steady.
Quick ratio vs current ratio
The main difference is what each ratio counts and how far ahead it looks. The current ratio includes inventory and prepaid expenses and takes a 12-month view, while the quick ratio strips those out to focus on the next 3 months.
Because it excludes assets that are slower to convert, the quick ratio gives you a stricter read on short-term liquidity. It's a useful companion when you're weighing your working capital and short-term commitments.
There's also the cash ratio, the tightest measure of the 3. You calculate it by dividing cash and cash equivalents by current liabilities, and understanding overall liquidity helps you read all these ratios in context.
Track your liquidity with Xero
Keeping an eye on your quick ratio is far easier when your numbers stay up to date in one place. Xero brings your cash, receivables, and liabilities together with real-time reporting, so you can check your short-term position whenever you need to. See how the accounting essentials fit your business and get one month free.
FAQs on the quick ratio
Here are answers to some frequently asked questions about the quick ratio.
What is a good quick ratio?
A quick ratio at or slightly above 1.0 is generally considered healthy for most businesses. The right benchmark depends on your industry, so compare against similar businesses rather than a single fixed number.
What's the difference between the quick ratio and the current ratio?
The quick ratio counts only your most liquid assets over about 3 months, while the current ratio adds inventory and prepaid expenses across 12 months. That makes the quick ratio a stricter test of short-term liquidity.
Why is the quick ratio important?
It shows lenders, investors, and you whether the business can meet its short-term obligations without relying on slower assets. That insight helps you spot cash flow pressure before it becomes a problem.
Can the quick ratio be too high?
Yes, a very high ratio can mean you're holding idle cash instead of reinvesting it in the business. Putting some of that cash to work may support growth while keeping enough on hand to cover your debts.
Related terms
Learn more about the quick ratio
Handy resources
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.