What is the quick ratio?

The quick ratio is a financial metric that shows whether your business has enough liquid assets to pay its current liabilities right now. It’s also called the acid test ratio.

Sum of cash, cash equivalents, short-term investments and accounts receivable, divided by current liabilities = quick ratio

Quick ratio formula Version 1.

The ratio only counts assets you can turn into cash quickly, so it strips out slower-moving items like inventory and prepaid expenses. Corporate Finance Institute (CFI) describes it as a test of whether you can pay current liabilities without selling inventory or borrowing more.

Formula shows current assets minus inventory and prepaid expenses, divided by current liabilities, equals quick ratio.

Quick ratio formula Version 2.

Picture a café owner in Bandung whose supplier bills and staff wages are due this month. The quick ratio shows whether their bank balance and unpaid customer invoices would cover those bills, with the coffee beans left on the shelf. Along with working capital, it’s one of the simplest ways to check your short-term financial health.

How to calculate the quick ratio

To calculate the quick ratio, divide your quick assets by your current liabilities. The result is a single number that sums up your short-term financial position.

There are two 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. The second starts with your total current assets and subtracts the items you can’t quickly turn into cash.

Worked example

Here’s how the first formula works with real numbers. Suppose your business has the following on its balance sheet.

Rp 50,000,000 in cash
Rp 10,000,000 in marketable securities
Rp 40,000,000 in net accounts receivable
Rp 30,000,000 in inventory
Rp 80,000,000 in current liabilities

Using Formula 1, your quick ratio is (Rp 50,000,000 + Rp 10,000,000 + Rp 40,000,000) / Rp 80,000,000. That’s Rp 100,000,000 / Rp 80,000,000, which equals 1.25.

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

What does a quick ratio of 1.5 mean?

A quick ratio of 1.5 means you have Rp 1.50 of quick assets for every Rp 1 of current liabilities. In other words, you hold a 50% buffer above what you owe in the short term.

If your current liabilities were Rp 80,000,000, a ratio of 1.5 would mean Rp 120,000,000 in quick assets. You could pay every short-term bill and still have Rp 40,000,000 left over.

Components of the quick ratio

The quick ratio uses specific asset and liability categories from your balance sheet. Knowing what goes in helps you see exactly where your liquidity stands.

Assets included

The quick ratio only counts assets you can turn into cash quickly. These are often called quick assets or liquid assets.

Cash and cash equivalents, such as bank balances, petty cash and short-term deposits
Marketable securities, such as shares listed on the Indonesia Stock Exchange (IDX) or government bonds (Surat Berharga Negara, or SBN)
Net accounts receivable, which is the money customers owe you minus any allowance for debts you don’t expect to collect

Under PSAK 207, Indonesia’s accounting standard for cash flow statements, cash equivalents are short-term, highly liquid investments that can be quickly converted into known amounts of cash with an insignificant risk of changes in value. Receivables are covered in more detail in the accounts receivable glossary entry.

Liabilities included

The bottom half of the formula is your current liabilities, which are debts and obligations due within the next 12 months. These typically include the following.

Accounts payable, which are bills you owe suppliers
Short-term loans and credit card balances
Tax obligations due within the year
Employee wages and BPJS contributions payable
The current portion of any long-term debt

Indonesian employers must register their workers with BPJS Ketenagakerjaan, the national employment social security agency (Badan Penyelenggara Jaminan Sosial), which bills employers for contributions every month. Any amounts you owe but haven’t yet paid belong in your current liabilities.

What’s excluded and why

The quick ratio 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. You’ve already spent that money, so you can’t convert it back into cash to pay a bill.

What is a good quick ratio?

A good quick ratio is generally 1.0 or higher. It means you have at least Rp 1 in liquid assets for every Rp 1 of short-term debt. You can meet your obligations without selling inventory or scrambling for funds.

Here’s how to read different results.

A ratio below 1.0 means you may struggle to pay bills on time without selling inventory, taking on new debt or finding another source of cash
A ratio of exactly 1.0 means your quick assets match your current liabilities, with no buffer left over
A ratio between 1.0 and 1.5 is often seen as a solid position that comfortably covers your short-term liabilities
A ratio well above 2.0 signals strong liquidity, but it could also mean you’re holding cash you could reinvest in growth

What counts as “good” varies by industry. A service business with little inventory might naturally have a higher quick ratio than a retailer with lots of stock. Track your ratio over time and compare it with similar businesses.

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 how well your business could handle a sudden bill.

Lenders and investors can use your quick ratio as one input when deciding whether to extend credit or invest in your business. A ratio that stays above 1.0 shows you manage cash well and can meet your obligations without relying on inventory sales.

A ratio below 1.0 is a signal worth investigating. It could mean you’re extending too much credit to customers, carrying heavy short-term debt or holding thin cash reserves.

Checking the ratio regularly gives you early visibility into potential cash flow problems. You can then act early, for example, by chasing overdue invoices or renegotiating payment terms with suppliers.

Quick ratio vs current ratio

The quick ratio and the current ratio both measure short-term liquidity, but they count different assets. The current ratio formula is current assets / current liabilities.

Here’s how the two ratios compare.

The current ratio counts all current assets, including inventory and prepaid expenses
The quick ratio counts only cash, marketable securities and net accounts receivable
The current ratio gives a broad view of short-term financial health
The quick ratio gives a stricter test of whether you can pay your debts quickly

If you run a business with large amounts of inventory, the gap between your current ratio and quick ratio can be wide. A high current ratio paired with a low quick ratio suggests that much of your liquidity is tied up in stock.

A 2026 study of Indonesian poultry and feed producer PT Charoen Pokphand Indonesia Tbk shows this gap in practice. Between 2019 and 2023, the company’s current ratio averaged 2.09 while its quick ratio averaged 1.12, with the researchers pointing to its substantial inventory investment.

Use the current ratio for a broad overview, and the quick ratio for a more cautious read on your ability to pay debts fast. You can compare these and other measures in the guide to liquidity ratios.

Limitations of the quick ratio

The quick ratio is a useful liquidity check, but it works best alongside other measures. It focuses on the short term, so you’ll need other tools to judge your long-term solvency.

It’s a snapshot of one moment. Your ratio can change within days as you pay bills or collect invoices.
It assumes your receivables will be paid. Overdue or disputed invoices make the ratio look stronger than it is if you count them at full value.
It ignores the timing of cash coming in and going out. As CFI’s acid-test ratio guide explains, a healthy ratio on paper can still leave a gap if big bills fall due before customers pay.
It varies by industry. A ratio that looks low for a consultancy can be normal for a retailer that sells its stock quickly.

How to improve your quick ratio

You can improve your quick ratio by increasing your liquid assets or reducing your short-term liabilities. These practical steps can help you do both.

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 shorten 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 in a dedicated savings or operating account gives you a buffer. Small, consistent contributions add up over time and strengthen your liquidity.

Manage inventory more efficiently

Inventory sits outside the quick ratio, yet trimming excess stock frees up cash that adds to your quick assets. Review your stock levels regularly and order only what you need.

Monitor your ratio regularly

Check your quick ratio monthly or quarterly so you can spot trends early and adjust before a dip becomes a problem. Real-time financial reports make this much easier.

Simplify your financial reporting with Xero

Tracking your quick ratio is easier when your financial data is accurate and up to date. With Xero, you get real-time visibility into your cash flow, receivables and liabilities, so you can check your liquidity without manual calculations.

Automatic bank feeds keep your numbers current. You can pull up your balance sheet at any time to see the figures behind your quick ratio. Try Xero today and get one month free.

FAQs on quick ratio

Here are answers to 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 counts assets you can turn into cash quickly. The other name, acid test ratio, comes from the old practice of testing gold with acid, which gave a fast, definitive answer on whether the metal was real.

Is a higher quick ratio always better?

A ratio above 1.0 is healthy, but a very high ratio (above 2.0 or 3.0) can mean you’re holding idle cash. You could put some of that money to work in your business, for example, by buying equipment or hiring staff.

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 arrange extra financing or collect outstanding invoices faster to close the gap.

Who uses the quick ratio?

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

How does the quick ratio differ from the cash ratio?

The cash ratio is stricter still, as it counts only cash and cash equivalents and leaves out receivables and marketable securities. It shows whether you could pay all your current liabilities today with the cash you have on hand.

Is the quick ratio suitable for every industry?

The quick ratio suits any business with short-term debts, though what counts as a healthy result varies by sector. Inventory-heavy businesses such as retailers and manufacturers often run lower quick ratios, so compare yours with similar businesses and read it alongside your current ratio.

Learn more about the quick ratio

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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.

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