Quick ratio explained: Formula, calculation and why it matters

Published Monday 5 January 2026

Table of contents

• Understanding the quick ratio: Definition and importance
• How to calculate the quick ratio
• What is a good quick ratio for your business?
• Analysing quick ratio results
• How to improve your quick ratio
• Making the quick ratio work for your business
• FAQs on quick ratio

Key takeaways

• Calculate your quick ratio monthly using the formula (cash + accounts receivable + short-term investments) ÷ current liabilities to monitor your business's ability to cover short-term debts within 3 months.
• Maintain a quick ratio of 1.0 or higher as a general target, though retail businesses may operate safely with ratios between 0.5-0.8 due to inventory investments.
• Exclude inventory and prepaid expenses from quick ratio calculations since these assets cannot be quickly converted to cash, focusing only on liquid assets like cash and accounts receivable.
• Improve a low quick ratio by speeding up invoice collection, reducing excess inventory, cutting non-essential expenses, or negotiating longer payment terms with suppliers.

Understanding the quick ratio: Definition and importance

The quick ratio is a financial metric that measures your business's ability to pay short-term debts using only your most liquid assets. It shows how well you can cover debts for the next three months without relying on inventory or prepaid expenses.

The quick ratio is a more cautious view of liquidity than other ratios because it:

• Excludes inventory: Stock can sit for months without selling
• Excludes prepaid expenses: These can't be converted to cash quickly
• Focuses on liquid assets: Only counts cash and assets easily converted to cash

When you combine the quick ratio with cash flow forecasts and projections, you can see whether you have enough cash to cover upcoming bills.

What does the quick ratio show?

The quick ratio allows you to:

• Check upcoming expenses: Assess if you can cover bills in the next 3 months
• Make purchase decisions: Determine if it's safe to buy new equipment or stock
• Measure short-term viability: Get a quick snapshot of your business's financial health
• Conduct monthly financial reviews: Track your liquidity position over time

Other liquidity ratios include the current ratio and cash ratio. The current ratio includes inventory and gives you a 12-month view. The cash ratio focuses solely on cash and cash equivalents but doesn't include accounts receivable.

Completing a quick ratio calculation every month or quarter could help you with cash flow management because it gives you more visibility on your financial position.

Quick ratio versus current ratio: understanding the differences

Key differences between the quick ratio and the current ratio:

• Time frame: Quick ratio covers 3 months; current ratio covers 12 months
• Assets included: Quick ratio excludes inventory; current ratio includes inventory
• Calculation: Quick ratio uses only liquid assets; current ratio uses all current assets
• Purpose: Quick ratio shows immediate liquidity; current ratio shows broader financial health

All the information you need to calculate current ratios can be found on your balance sheet.

For both the current ratio and quick ratio, a higher ratio generally means you have more money to cover costs, but it’s important to remember that acceptable current ratios vary between sectors. You can find more tips in the guide on the current ratio.

How to calculate the quick ratio

Here’s how to calculate the quick ratio.

Quick ratio formula and calculation steps

The quick ratio formula can be calculated two ways, depending on which financial information you have readily available.

Quick ratio formula Version 1.

Quick ratio formula Version 2.

Where to find quick ratio numbers:

• Balance sheet: All figures come from your current balance sheet
• Accounting software: Pull up your balance sheet in a few clicks
• Manual tracking: Use our balance sheet template if you don't have software
• Key sections: Look for current assets and current liabilities sections

What counts as liquid assets in quick ratio calculations

Liquid assets are those that can be quickly converted to cash without losing significant value. For the quick ratio, these typically include cash on hand, cash equivalents like money market funds, short-term investments that can be sold within 90 days, and accounts receivable from customers.

What doesn't count as liquid assets? Inventory is the big one: even if you have valuable stock, it might take weeks or months to sell. Prepaid expenses like insurance or rent payments also don't count, as you can't convert these back to cash. Equipment, property, and long-term investments are also excluded because they take time to sell.

Examples of quick ratio calculations

Nina runs a stationery shop. Sales are steady, but she has a few large payments on the horizon for remodelling and redecorating. She decides to calculate her business's quick ratio to make sure she can cover upcoming bills.

Nina uses the following quick ratio formula:

• Cash + marketable securities (financial assets that can easily be bought and sold, like stocks) + accounts receivable (money owed to you) / current liabilities (money your business owes) = quick ratio.

Nina has £10,000 in cash and no marketable securities like stocks or bonds. She does have an outstanding invoice of £750 due from a corporate customer. This means she has £10,750 in liquid assets.

In terms of current liabilities, Nina owes £5,000 for the remodel of her shop, and £2,500 for painting and decorating. That's a total of £7,500 for current liabilities.

• The calculation for Nina's quick ratio is: £10,750 / £7,500 = 1.4

Because Nina's quick ratio is higher than 1.0, she could cover the bills for remodelling and redecorating.

Let's look at one more example using the other quick ratio formula.

Oman owns a clothing store. Things are going well, but he wants to check the financial impact of a new till and Point of Sale (POS) system that he purchased this week.

Oman uses the following quick ratio formula:

• Current assets (cash, cash equivalents, accounts receivable) - inventory and prepaid expenses / current liabilities = quick ratio

Oman has £15,000 in cash (current assets) and no cash equivalents or accounts receivable. But, according to his balance sheet, he does have £8,000 worth of inventory.

Oman's current liabilities include things like payroll, supplier invoices, and some interest owed. This comes to £5,000. The new till and Point of Sale (POS) system cost £2,000.

• The quick ratio calculation for Oman's business is (£15,000 - £8,000) / (£5,000 + £2,000) = 1.0

Oman's quick ratio of 1.0 means he can cover the costs in this calculation. If his quick ratio falls below 1.0, he may find it harder to pay bills on time. Lifting his quick ratio gives him more cash to handle unexpected costs.

What is a good quick ratio for your business?

A good quick ratio is generally 1.0 or higher, as the ideal ratio is 1:1, which means you can cover all short-term debts with liquid assets.

Industry considerations for quick ratios

What's considered a healthy quick ratio varies by industry:

• Retail businesses: Often have lower ratios due to inventory investment
• Service businesses: Typically maintain higher ratios with less tied-up capital
• Seasonal businesses: May see significant ratio fluctuations throughout the year
• Manufacturing businesses: Usually have moderate ratios due to equipment and materials

When quick ratios might be misleading

The quick ratio is just a snapshot in time. A large payment or a sudden influx of cash can change it overnight, which doesn't always reflect the overall health of your business. For a more reliable view, track your quick ratio over time and use it alongside other financial tools like cash flow forecasts and profit and loss statements.

Analysing quick ratio results

If your quick ratio is below 1.0:

• Generate more cash: Speed up invoice collection or increase sales
• Reduce expenses: Cut non-essential costs to preserve cash
• Manage timing: Delay large purchases until cash flow improves
• Consider financing: Arrange credit lines for short-term cash needs

The quick ratio is a snapshot of your financial position at one moment in time. Industry and business type can impact your quick ratio, meaning it's best to compare your quick ratio to businesses like yours.

Retail stores often have cash tied up in stock, which means they have less liquidity; this means a current ratio of less than 1 might be acceptable. When retailers calculate the quick ratio, they usually deduct a larger portion of inventory than other business types, such as service firms.

The quick ratio gives you a snapshot of your business's finances at a single point in time. Use the quick ratio alongside cash flow forecasts, profit and loss statements, and other reports, rather than on its own.

Track your quick ratio over time:

• Monthly calculations: Monitor trends rather than single measurements
• Seasonal patterns: Expect fluctuations based on your business cycle
• Major transactions: Large purchases or payments will cause temporary changes
• Context matters: Combine with cash flow forecasts for complete picture

Ideal quick ratio benchmarks:

• General target: 1.0 or higher shows healthy liquidity
• Retail businesses: 0.5 to 0.8 may be normal due to inventory needs
• Seasonal businesses: Expect significant variation throughout the year
• Service businesses: Often maintain 1.5 or higher ratios

Alternative analysis tools for challenging ratios:

• Cash flow forecasting: Shows future liquidity trends
• Current ratio: Includes inventory for broader view
• Industry comparisons: Benchmark against similar businesses

Liquidity fluctuates. You might have periods where there's plenty of free cash because you're yet to hire new staff, or your accounts receivable are full of unpaid invoices. At other times, you may have less cash available after opening a new office, a sign that you're growing.

Along with calculating your quick ratio, generating cash flow statements, forecasts, and projections can help with cash flow management. These show income and expenditure from a variety of sources: operations, investments, and financing.

How to improve your quick ratio

Here are some ways you can improve your quick ratio:

• Reduce inventory levels: Convert stock to cash by selling excess inventory
• Speed up collections: Offer payment incentives or improve invoice processes
• Increase sales: Focus on quick-turning products or services
• Delay payments: Negotiate longer payment terms with suppliers
• Cut expenses: Reduce non-essential costs to preserve cash

With Xero accounting software, getting a complete picture of your finances is simple. Pull up balance sheets in a few clicks and access the numbers you need to complete a quick ratio calculation. Xero features use live data from your bookkeeping records, so as long as your reconciliations are up to date, the numbers on your balance sheet will be too.

You also have plenty of tools to support healthy cash flow. A live dashboard and cash flow forecast and projection reports help you quickly see your current financial position.

Making the quick ratio work for your business

Benefits of monitoring your quick ratio:

• Plan ahead: Anticipate cash needs for upcoming bills
• Identify problems early: Spot liquidity issues before they become critical
• Make informed decisions: Know when it's safe to make large purchases
• Improve operations: Understand which changes will strengthen your finances
• Build confidence: Track progress toward better financial health

By regularly monitoring your quick ratio with reliable data, you can gain valuable insights and manage your cash flow with confidence. See how simple it can be to stay on top of your numbers when you try Xero for free.

FAQs on quick ratio

Here are some common questions about the quick ratio.

Is a quick ratio below 1.0 always bad?

Not necessarily. While a ratio below 1.0 suggests you might struggle to cover short-term debts, it’s important to consider your industry. Some businesses, like those in manufacturing or retail, naturally have lower quick ratios because a lot of their money is tied up in high levels of inventory. It’s more important to track the trend over time and understand the context.

How often should I calculate the quick ratio?

Calculating your quick ratio monthly or quarterly works well for most small businesses. This lets you monitor liquidity, spot trends, and make timely decisions without reacting to daily ups and downs.

What’s the difference between quick assets and current assets?

Current assets include all assets that can be converted to cash within a year, such as cash, accounts receivable, and inventory. Quick assets are a subset of current assets that can be converted to cash much more quickly, typically within 90 days. The main difference is that quick assets exclude inventory, which can take longer to sell.