What is the quick ratio?

The quick ratio, or acid test ratio, measures whether your business’s most liquid assets can pay off its current liabilities today. It’s one of the most widely used checks on short-term financial health.

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 and close to their value on the balance sheet. That’s why it strips out slower-moving items such as inventory and prepaid expenses.

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

Quick ratio formula Version 2.

Picture every supplier and lender asking to be paid tomorrow. Your quick ratio shows whether the cash you hold and the money customers owe you would cover those bills without selling any stock.

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 position.

You can write the quick ratio formula in two ways:

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

Formula 2: quick ratio = (current assets minus inventory minus prepaid expenses) ÷ current liabilities

The first formula adds up your liquid assets directly. The second starts with total current assets and subtracts the slower items, so the results can differ slightly if you hold other current assets.

Follow these steps to work out your own quick ratio using Formula 1:

Open your balance sheet for the date you want to measure and find your current assets
Add together your cash, marketable securities and net accounts receivable to get your quick assets
Find the total of your current liabilities on the same balance sheet
Divide your quick assets by your current liabilities

Here’s how those steps look with example figures. The example uses a typical small business with some stock on hand.

Worked example

Suppose your business has these figures on its balance sheet:

cash of RM50,000
marketable securities of RM10,000
net accounts receivable of RM40,000
inventory of RM30,000
current liabilities of RM80,000

Using Formula 1: quick ratio = (RM50,000 + RM10,000 + RM40,000) ÷ RM80,000 = RM100,000 ÷ RM80,000 = 1.25

The RM30,000 of inventory stays out of the calculation. A result of 1.25 means you have RM1.25 in quick assets for every RM1 of short-term debt. You could pay everything due and still keep a buffer.

Components of the quick ratio

The quick ratio uses a set of assets and liabilities from your balance sheet. Knowing what goes in, and what stays out, shows you exactly where your liquidity comes from.

Assets included

Quick assets, sometimes called liquid assets, are items you can convert to cash quickly and close to their recorded value. They include:

cash in your bank accounts, including petty cash
cash equivalents, such as short-term, highly liquid deposits
marketable securities, such as shares or government bonds you can sell on an exchange at any time
net accounts receivable, which is money customers owe you minus an allowance for debts you don’t expect to collect

Liabilities included

Current liabilities are debts and obligations due within the next 12 months. For Malaysian employers, they include statutory contributions to the Employees Provident Fund (EPF), the Social Security Organisation (SOCSO) and the Employment Insurance System (EIS).

Typical current liabilities include:

accounts payable, meaning bills you owe suppliers
short-term loans and credit card balances
tax obligations due within the year
employee wages and EPF, SOCSO and EIS contributions 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 a rushed sale may bring in less than it’s worth.

Prepaid expenses, such as insurance or rent paid in advance, are excluded too. You’ve already spent that money on services you’ll receive later, so you can’t use it to pay bills.

What is a good quick ratio?

A quick ratio of 1.0 or above is generally considered healthy. It means you have at least RM1 in quick assets for every RM1 of short-term debt, so you can meet your obligations without selling stock.

Here’s how to read common results:

A ratio below 1.0 suggests you may need to sell stock, borrow or find other cash to pay every short-term bill on time
A ratio of 0.75 means you hold RM0.75 in quick assets for each RM1 you owe in the short term
A ratio between 1.0 and 1.5 is often seen as a solid position with a comfortable buffer
A ratio of 1.5 means you hold RM1.50 in quick assets for each RM1 of current liabilities
A ratio well above 2.0 shows strong liquidity, though it may also mean cash is sitting idle

What counts as good also depends on your industry and business model. A service business with little stock often has a higher quick ratio than a retailer or manufacturer that keeps shelves and warehouses full.

Seasonal businesses can see their ratio swing through the year as they build stock before busy periods. Tracking your own ratio over time, and comparing it with similar businesses, gives you the most useful benchmark.

What the quick ratio tells you and your lenders

Your quick ratio tells you whether you could pay all your short-term debts today using only your most accessible assets. Lenders and investors read it the same way when judging your financial resilience.

Banks and investors often check your quick ratio before offering credit or putting money into your business. A ratio that stays above 1.0 shows you manage cash well and can meet obligations without relying on stock sales.

A dip below 1.0 is a signal to look closer. It could point to generous customer credit terms or heavy short-term borrowing.

Checking the ratio regularly gives you early warning of cash flow pressure. You then have time to act, for example by chasing payments or renegotiating supplier terms, before a shortfall becomes urgent.

Quick ratio vs current ratio

The quick ratio and the current ratio both measure short-term liquidity, but the quick ratio counts fewer assets. That makes it the stricter test of the two.

The current ratio includes all current assets: cash, receivables, inventory, prepaid expenses and anything else you expect to use or convert within 12 months. Its formula is:

Current ratio = current assets ÷ current liabilities

By stripping out inventory and prepaid expenses, the quick ratio only counts assets you can realistically turn into cash at short notice. If you carry a lot of stock, the gap between your two ratios can be wide.

A high current ratio paired with a low quick ratio suggests much of your liquidity is tied up in stock. Use the current ratio for a broad overview, and the quick ratio for a cautious check on whether you can pay debts quickly.

Both sit within a wider family of liquidity ratios that you can use together for a fuller picture.

Pros and limitations of the quick ratio

The quick ratio is simple and conservative, which makes it popular with lenders and owners alike. Like any single measure, it also has blind spots worth knowing about.

Why owners and lenders rely on it

The ratio earns its place in financial reviews for a few practical reasons. It:

uses figures you can take straight from your balance sheet
takes a cautious view by leaving out stock and prepayments
gives lenders a quick, comparable read on your ability to repay
makes trends easy to spot when you calculate it on the same date each month

Limitations to account for

The ratio measures short-term liquidity, so it’s worth understanding the difference between liquidity and solvency before drawing wider conclusions. Within its own scope, the quick ratio:

shows a snapshot on one date, which can change the day after a large payment
assumes customers will pay the receivables you’ve counted
ignores when cash actually comes in and goes out during the period
can understate liquidity for businesses that sell stock quickly

The Corporate Finance Institute notes the acid test ratio excludes inventory because stock can’t always be sold quickly at fair value. For businesses that turn stock over fast, that exclusion may make liquidity look weaker than it is.

To cover the timing gap, pair your quick ratio with a cash flow forecast. It shows when money is due to arrive and leave, so you can plan around tight weeks.

Quick ratio vs cash ratio

The cash ratio is stricter than the quick ratio because it counts only cash and cash equivalents. It answers one question: could you pay all your current liabilities right now with the cash you hold?

The Corporate Finance Institute describes the cash ratio as the most conservative liquidity ratio. Its formula is:

Cash ratio = cash and cash equivalents ÷ current liabilities

Using the worked example, only the RM50,000 in cash would count, giving a cash ratio of about 0.63. The quick ratio of 1.25 is higher because it also counts receivables and marketable securities.

Looking at both ratios together shows how much of your buffer depends on customers paying on time.

How to improve your quick ratio

You improve your quick ratio by increasing your quick assets, reducing your short-term liabilities, or both. These practical tips can help.

Speed up your receivables

The sooner customers pay, the more cash you have available. Send invoices promptly, set clear payment terms and follow up on overdue invoices.

Offering online payment options can also shorten the time between sending an invoice and receiving payment.

Reduce short-term liabilities

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

Build your cash reserves

Setting aside part of your revenue in a dedicated account gives you a buffer. Small, regular transfers add up and strengthen your position over time.

Manage inventory more efficiently

Inventory sits outside the quick ratio, but excess stock locks up cash you could hold instead. Reviewing stock levels regularly and ordering only what you need frees up working capital.

Monitor your ratio regularly

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

Track your quick ratio with Xero

A reliable quick ratio starts with up-to-date numbers. Xero’s bank feeds bring your transactions into Xero automatically, and real-time reports let you pull up your balance sheet whenever you need it.

With current figures always to hand, you can check your liquidity in minutes and plan ahead with confidence. Try Xero today and get one month free to see exactly where your business stands.

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 using acid to test whether metal was real gold.

Is a higher quick ratio always better?

A higher ratio means stronger liquidity, but a very high one can mean cash isn’t working for you. That money could fund growth, such as new equipment or extra staff.

Is a quick ratio of 0.75 good?

A ratio of 0.75 is below the usual 1.0 benchmark, so you’d need stock sales or new cash to cover all short-term debts. It can be manageable for a business that sells stock quickly, as long as it’s stable or improving over time.

Can a business have a high current ratio but a low quick ratio?

Yes, and it’s common for retailers and manufacturers that hold a lot of stock. It means paying your bills depends on selling that stock, so keep a close eye on how fast it moves.

Who uses the quick ratio?

Business owners, accountants, lenders and investors all use it. Suppliers may also check it before offering you trade credit.

Learn more about 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.

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