Quick ratio
See what the quick ratio measures, how to calculate it, and what a healthy result means for your business.
February 2024 | Published by Xero
Published Monday 17 August 2026
Table of contents
Key takeaways
- The quick ratio measures your ability to pay short-term debts using only your most liquid assets, excluding inventory.
- A quick ratio of 1.0 or higher generally indicates healthy short-term liquidity, though ideal ranges vary by industry.
- Tracking your quick ratio over time helps you spot cash flow problems early and make informed financial decisions.
- Improving your quick ratio involves speeding up receivables, reducing short-term liabilities, and building cash reserves.
What is the quick ratio?
The quick ratio is a liquidity metric that shows whether your business can cover its short-term obligations using assets that can be converted to cash within 90 days or less. It excludes inventory because stock cannot always be sold quickly at full value.
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Quick ratio formula Version 1.
Also known as the acid-test ratio, this measure gives a more conservative view of liquidity than the current ratio. It answers a straightforward question: if you needed to pay all your current liabilities right now, could you do it without selling inventory?
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Quick ratio formula Version 2.
How to calculate the quick ratio
Calculating your quick ratio requires figures from your balance sheet. The formula is:
Quick ratio = (cash + marketable securities + net accounts receivable) / current liabilities
Here is a worked example using Philippine peso values:
- Cash: ₱50,000
- Marketable securities: ₱10,000
- Net accounts receivable: ₱40,000
- Inventory: ₱30,000
- Current liabilities: ₱80,000
Quick ratio = (₱50,000 + ₱10,000 + ₱40,000) / ₱80,000 = ₱100,000 / ₱80,000 = 1.25
This result means the business has ₱1.25 in liquid assets for every ₱1 of short-term debt.
Components of the quick ratio
Understanding each component helps you identify which areas to focus on when improving your liquidity position.
Quick assets
Quick assets are those you can convert to cash rapidly. They include:
- Cash and cash equivalents (bank balances, petty cash, short-term deposits)
- Marketable securities (stocks, bonds, or other investments easily sold on public markets)
- Net accounts receivable (money owed by customers, minus any allowance for doubtful accounts)
Current liabilities
Current liabilities are debts due within 12 months. They include:
- Accounts payable (money owed to suppliers)
- Short-term loans and credit lines
- Accrued expenses
- Employee wages and statutory contributions payable (SSS, PhilHealth, Pag-IBIG)
- Taxes payable
What is a good quick ratio?
A quick ratio of 1.0 or above is generally considered healthy, indicating you can meet your short-term obligations without selling inventory. According to the Corporate Finance Institute, a ratio above 1 suggests a business can cover its immediate liabilities with liquid assets alone.
Healthy ranges vary by industry. Service businesses with little inventory naturally run higher quick ratios than inventory-heavy retailers, which may still be sound at a lower ratio because their stock turns over quickly. Compare your ratio against similar businesses in your sector and track changes over time rather than relying on a single benchmark.
Quick ratio vs. current ratio
Both ratios measure short-term liquidity, but they treat inventory differently. The current ratio includes all current assets, while the quick ratio excludes inventory.
- Current ratio formula: current assets / current liabilities
- Quick ratio formula: (cash + marketable securities + net accounts receivable) / current liabilities
Use the current ratio when your inventory turns over quickly and reliably. Use the quick ratio when you want a stricter test of liquidity or when your stock is slow-moving, seasonal, or difficult to value.
Quick ratio vs. cash ratio
The cash ratio is an even stricter liquidity measure than the quick ratio. It counts only cash and cash equivalents, excluding both inventory and receivables.
Cash ratio = (cash + cash equivalents) / current liabilities
While the quick ratio assumes you can collect receivables and sell marketable securities promptly, the cash ratio asks whether you could pay all current liabilities using only the cash you have on hand right now. A cash ratio of 0.5 means you hold ₱0.50 in cash for every ₱1 of short-term debt.
Use the cash ratio when you need the most conservative view of liquidity, such as during periods of economic uncertainty or when receivables are slow to collect. The quick ratio suits everyday monitoring, while the cash ratio highlights your immediate cash position.
What the quick ratio means for your business
Your quick ratio reveals how prepared you are for unexpected expenses or slow sales periods. A ratio above 1.0 suggests you can handle short-term obligations without borrowing or liquidating inventory at a discount.
Lenders and investors often review this metric when assessing creditworthiness. A strong quick ratio can support loan applications, while a declining ratio may signal cash flow issues that need attention. Tracking this figure monthly helps you spot trends before they become problems.
Limitations of the quick ratio
While the quick ratio is a useful liquidity indicator, it has limitations you should understand before relying on it exclusively.
- Ignores receivables timing: The ratio assumes all receivables will be collected, but it does not account for when payments will arrive. A large receivable due in 90 days does not help you pay a bill due tomorrow.
- Assumes all receivables are collectible: Overdue or doubtful accounts inflate your quick assets on paper without providing real liquidity.
- Represents a single point in time: The ratio is a snapshot. It can look strong on the day you receive a large payment and weak the day after you pay suppliers.
- Ignores profitability and cash flow: A business can have a healthy quick ratio while losing money or burning through cash. The ratio measures assets and liabilities, not income or operating cash flow.
- Varies by industry: Comparing your ratio to businesses in different sectors can be misleading. Always benchmark against similar companies and track your own ratio over time.
How to improve your quick ratio
Strengthening your quick ratio involves increasing liquid assets, reducing short-term liabilities, or both. Here are five practical approaches.
Speed up your receivables
Collect payments faster by offering early payment discounts, sending invoices promptly, and following up on overdue accounts. Accepting online payments makes it easier for customers to pay on time. Tightening credit terms for new customers can also reduce the time between sale and collection.
Reduce short-term liabilities
Pay down short-term debt where possible, or negotiate longer payment terms with suppliers to push liabilities beyond the 12-month window. Avoid taking on new short-term loans unless necessary, and consolidate high-interest debt into longer-term financing when it makes sense.
Build your cash reserves
Set aside a portion of profits each month into a dedicated reserve account. Even small, consistent contributions add up over time and provide a buffer against unexpected expenses or slow periods.
Manage inventory more efficiently
While inventory does not count toward your quick assets, reducing excess stock frees up cash that does. Review slow-moving items, run promotions to clear old inventory, and order smaller quantities more frequently to avoid tying up capital.
Monitor your ratio regularly
Check your quick ratio monthly rather than waiting for year-end. Using real-time reports helps you spot changes early and respond before small issues become larger problems.
Simplify your financial reporting with Xero
Keeping track of your liquidity ratios is easier when your financial data is accurate and up to date. Xero brings your cash, receivables, and liabilities together in one place, giving you a clear view of where your business stands. With automated bank feeds and real-time dashboards, you spend less time on manual data entry and more time making informed decisions. Get one month free and see how Xero can support your financial reporting.
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?
The name refers to "quick assets," those that can be converted to cash quickly, typically within 90 days. It is also called the acid-test ratio because it provides a rigorous test of short-term financial health.
Is a higher quick ratio always better?
Not necessarily. A very high quick ratio may indicate you are holding too much cash that could be reinvested in growth opportunities. The goal is maintaining enough liquidity to cover obligations while still putting assets to productive use.
What happens if a business has a quick ratio below 1?
A ratio below 1 means quick assets alone cannot cover current liabilities. This does not guarantee trouble, but it signals you may need to rely on inventory sales, additional financing, or improved collections to meet short-term obligations.
Who uses the quick ratio?
Business owners, lenders, investors, and financial analysts all use the quick ratio. Lenders review it when evaluating loan applications, while business owners track it to monitor cash flow health.
Why isn't inventory included in the quick ratio?
Inventory is excluded because it cannot always be sold quickly at full value. Perishable goods, seasonal items, or obsolete stock may take months to convert to cash, making them less reliable for covering immediate obligations.
How do customer payment terms affect your quick ratio?
Longer payment terms increase your accounts receivable balance, which raises your quick assets on paper. However, extended terms also delay actual cash collection, so the ratio may overstate your real liquidity if customers take the full time to pay.
Related terms
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.