{"id":10060,"date":"2024-11-12T05:43:52","date_gmt":"2024-11-12T10:43:52","guid":{"rendered":"https:\/\/www.sage.com\/en-ca\/blog\/?p=10060"},"modified":"2025-08-05T08:55:35","modified_gmt":"2025-08-05T12:55:35","slug":"what-is-quick-ratio","status":"publish","type":"post","link":"https:\/\/www.sage.com\/en-ca\/blog\/what-is-quick-ratio\/","title":{"rendered":"What is quick ratio?"},"content":{"rendered":"<header class=\"entry-header has-dark-background-color entry-header--has-illustration entry-header--has-illustration--generic\">\n\t<div class=\"container\">\n\t\t<div class=\"entry-header__row row align-center\">\n\t\t\t<div class=\"col col-lg-7 col-xlg-6 entry-header__content\">\n\t\t\t\t\t\t\t<div class=\"component component-single-header\">\n\t\t\t\t\t\t\t\t\t\t<div class=\"entry-header__misc text--subtitle text--uppercase text--small\">\n\t\t\t\t\t\t\t<a href=\"https:\/\/www.sage.com\/en-ca\/blog\/category\/money-matters\/\" class=\"entry-header__link\">Money Matters<\/a>\t\t\t\t\t\t<\/div>\n\t\t\t\t\n\t\t\t\t<div class=\"entry-title-wrapper\">\n\t\t\t\t\t<h1 class=\"entry-title\">\n\t\t\t\t\t\tWhat is quick ratio?\t\t\t\t\t<\/h1>\n\t\t\t\t<\/div>\n\n\t\t\t\t\t\t\t\t\t<p class=\"entry-header__description\">\n\t\t\t\t\t\t\t\t\t\t\t<\/p>\n\t\t\t\t\n\t\t\t\t\n\t\t\t\t\n\t\t\t<\/div>\n\n\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n\t\t<div class=\"single-post-details container\">\n\t\t<div class=\"col\">\n\t\t\t<span class=\"posted-on \"><time class=\"entry-date published\" datetime=\"2024-11-12T05:43:52-05:00\">November 12, 2024<\/time><\/span><span class=\"reading-time\"> min read<\/span>\n\t\t<button\n\t\t\ttype=\"button\"\n\t\t\tclass=\"social-share-button button button--icon button--secondary js-social-share-button\"\n\t\t\tdata-share-title=\"What is quick ratio?\"\n\t\t\tdata-share-url=\"https:\/\/www.sage.com\/en-ca\/blog\/what-is-quick-ratio\/\"\n\t\t\tdata-share-text=\"Please read this interesting article\"\n\t\t>\n\t\t\t<span class=\"social-share-button__share-label\">Share<\/span>\n\t\t\t<span class=\"social-share-button__copy-label\" hidden>Copy Link<\/span>\n\t\t\t<span class=\"social-share-button__copy-tooltip\" aria-hidden=\"true\" hidden>Copied<\/span>\n\t\t<\/button>\n\n\t\t\t\t<\/div>\n\t<\/div>\n\t<\/header>\n\n\n\n<div class=\"wp-block-post-author has-dark-background-color alignfull\">\n\t<div class=\"container\">\n\t\t<div class=\"col\">\n\t\t\t\t\t\t\t<div class=\"co-authors\">\n\t\t\t\t\t\n\t\t<div class=\"entry-author-wrapper\">\n\t\t\t<a class=\"entry-author\" href=\"https:\/\/www.sage.com\/en-ca\/blog\/author\/asavinwattanajantra\/\">\n\t\t\t\t<img loading=\"lazy\" decoding=\"async\" width=\"40\" height=\"40\" src=\"https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2026\/03\/Asavin-350x350.jpg\" class=\"entry-author__image\" alt=\"Asavin\" srcset=\"https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2026\/03\/Asavin-350x350.jpg 350w, https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2026\/03\/Asavin-768x768.jpg 768w, https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2026\/03\/Asavin-810x810.jpg 810w, https:\/\/www.sage.com\/en-ca\/blog\/wp-content\/uploads\/sites\/12\/2026\/03\/Asavin.jpg 1000w\" sizes=\"auto, (max-width: 40px) 100vw, 40px\" \/>\t\t\t\t<span class=\"entry-author__name\">Asavin Wattanajantra<\/span>\n\t\t\t<\/a>\n\n\t\t\t\t\t<\/div>\n\n\t\t\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t<\/div>\n<\/div>\n\n\n\n\n\n<p>The quick ratio, or \u201cacid test,\u201d is a financial metric that measures your <strong>business\u2019s liquidity\u2014your ability to meet short-term obligations using only your most liquid assets<\/strong>.<\/p>\n\n\n\n<p>This ratio reflects your business\u2019s capacity to cover expenses, pay employees, and make necessary investments without delay.<\/p>\n\n\n\n<p>The quick ratio focuses on assets that can be converted to cash\u00a0quickly, such as cash reserves and <a href=\"https:\/\/www.sage.com\/en-ca\/accounting-software\/accounts-receivable\/\" target=\"_blank\" rel=\"noreferrer noopener\">accounts receivables<\/a>, and <strong>shows your company\u2019s financial flexibility and resilience.<\/strong><\/p>\n\n\n\n<p>Usually, for your business:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>a <strong>higher ratio signals greater liquidity <\/strong>and a<strong> stronger position to handle your immediate commitments<\/strong>,<\/li>\n\n\n\n<li><strong>a lower ratio <\/strong>could indicate that you have <strong>limited flexibility for meeting short-term obligations<\/strong><\/li>\n<\/ul>\n\n\n\n<p>Immediate financial commitments\/obligations could include expanding product lines, hiring talent, or managing customer acquisition costs.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-here-s-what-we-ll-cover\">Here&#8217;s what we&#8217;ll cover<\/h4>\n\n\n<?xml encoding=\"utf-8\" ?><div class=\"wp-block-yoast-seo-table-of-contents yoast-table-of-contents\"><ul><li><a href=\"#h-how-to-calculate-the-quick-ratio\" data-level=\"2\">How to calculate the quick ratio<\/a><\/li><li><a href=\"#h-what-does-the-quick-ratio-tell-you\" data-level=\"2\">What does the quick ratio tell you?<\/a><\/li><li><a href=\"#h-possible-industry-applications-of-the-quick-ratio\" data-level=\"2\">Possible industry applications of the quick ratio<\/a><\/li><li><a href=\"#h-quick-ratio-versus-current-ratio-the-key-differences\" data-level=\"2\">Quick ratio versus current ratio: The key differences<\/a><\/li><li><a href=\"#h-cash-ratio-versus-quick-ratio\" data-level=\"2\">Cash ratio versus quick ratio<\/a><\/li><li><a href=\"#h-the-power-of-the-quick-ratio-in-financial-analysis\" data-level=\"2\">The power of the quick ratio in financial analysis<\/a><\/li><li><a href=\"#h-final-thoughts\" data-level=\"2\">Final thoughts<\/a><\/li><\/ul><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-how-to-calculate-the-quick-ratio\">How to calculate the quick ratio<\/h2>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-formula\">Formula<\/h4>\n\n\n\n<p><strong>Quick ratio = (current assets &#8211; inventory) \/ current liabilities<\/strong><\/p>\n\n\n\n<p><strong>Here\u2019s how it breaks down:<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Current assets: <\/strong>assets that can be turned into cash within a year, like cash, accounts receivable, and marketable securities.<\/li>\n\n\n\n<li><strong>Inventory: <\/strong>excluded from the quick ratio as it may take time to sell; for example, unsold stock in a retail store<strong>.<\/strong><\/li>\n\n\n\n<li><strong>Current liabilities: s<\/strong>hort-term obligations due within a year, such as supplier bills, wages, or short-term loans.<\/li>\n<\/ul>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-example\">Example<\/h4>\n\n\n\n<p>Your company has $500,000 in current assets, $100,000 in inventory, and $200,000 in current liabilities.<\/p>\n\n\n\n<p>Subtract inventory from current assets: $500,000 &#8211; $100,000 = $400,000.<\/p>\n\n\n\n<p>Divide by current liabilities to get the quick ratio: $400,000 \/ $200,000 = 2.0.<\/p>\n\n\n\n<p><strong>A quick ratio of 2.0 shows that your company has twice as many liquid assets as needed to cover its short-term liabilities.<\/strong><\/p>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-what-does-the-quick-ratio-tell-you\">What does the quick ratio tell you?<\/h2>\n\n\n\n<p>Generally, a quick ratio above 1.0 suggests that your company can comfortably meet its immediate obligations.<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<figure class=\"wp-block-pullquote\"><blockquote><p>CFO tip: recognize red flags<br><br>A sudden drop in your quick ratio could signal delayed payments or cash flow issues. Review your accounts receivable regularly and watch for patterns of late payments from key clients.<\/p><\/blockquote><\/figure>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-what-is-a-good-quick-ratio\">What is a good quick ratio?<\/h4>\n\n\n\n<p>The ideal quick ratio could vary by industry. For example, if your industry average is 3.0, a ratio of 2.0 might indicate relatively weaker liquidity<\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<figure class=\"wp-block-pullquote\"><blockquote><p>CFO tip: improve your quick ratio<br><br>Reducing unnecessary expenses, deferring non-essential capital expenditures and renegotiating supplier terms can quickly boost your quick ratio by keeping liquid assets readily available.<\/p><\/blockquote><\/figure>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-possible-industry-applications-of-the-quick-ratio\">Possible industry applications of the quick ratio<\/h2>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-manufacturing-and-retail\"><strong>Manufacturing<\/strong> <strong>and retail<\/strong><\/h4>\n\n\n\n<p>High inventory levels can slow liquidity, making the quick ratio a valuable tool to focus on truly liquid assets.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>A ratio above 1.5 can help cover short-term obligations despite delayed cash inflows.<\/li>\n<\/ul>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-saas\"><strong>SaaS<\/strong><\/h4>\n\n\n\n<p>With minimal inventory, SaaS companies can rely on accounts receivable and cash reserves as primary liquid assets.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>A ratio of around 1.0 generally covers liabilities and frees up funds for growth initiatives.<\/li>\n<\/ul>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-financial-services\"><strong>Financial services<\/strong><\/h4>\n\n\n\n<p>Liquidity is crucial for financial institutions to meet sudden cash demands during market volatility.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>A ratio above 1.0 ensures resilience, allowing coverage of short-term liabilities without disrupting investments.<\/li>\n<\/ul>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-professional-services\"><strong>Professional services<\/strong><\/h4>\n\n\n\n<p>Professional services firms rely on accounts receivable rather than inventory.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>A ratio around 1.0 is typically sufficient to cover expenses, maintaining cash flow for payroll and operational needs.<\/li>\n<\/ul>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-healthcare\"><strong>Healthcare<\/strong><\/h4>\n\n\n\n<p>Healthcare providers face cash flow delays due to insurance reimbursements and fluctuating patient volumes.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>A ratio above 1.0 supports financial stability, enabling coverage of immediate costs like payroll and medical supplies.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-quick-ratio-versus-current-ratio-the-key-differences\">Quick ratio versus current ratio: The key differences<\/h2>\n\n\n\n<p>Another term that you may encounter could be the <strong>current ratio.<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-table\"><table class=\"has-fixed-layout\"><tbody><tr><td><\/td><td><strong>Quick ratio<\/strong><\/td><td><strong>Current ratio<\/strong><\/td><\/tr><tr><td><strong>Definition<\/strong><\/td><td>Measures your company&#8217;s ability to cover immediate obligations using the most liquid assets, <strong>excluding inventory.<\/strong><\/td><td>Measures your company\u2019s ability to cover short-term obligations using all current assets, <strong>including inventory.<\/strong><\/td><\/tr><tr><td><strong>Formula<\/strong><\/td><td>(Current assets &#8211; Inventory) \/ current liabilities<\/td><td>Current assets \/ current liabilities<\/td><\/tr><tr><td><strong>Best use case<\/strong><\/td><td>For industries where inventory is not easily converted to cash, e.g., manufacturing.<\/td><td>For industries where inventory turnover is high, e.g., retail.<\/td><\/tr><\/tbody><\/table><\/figure>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-the-quick-ratio-is-a-conservative-measure-of-liquidity\">The quick ratio is a conservative measure of liquidity<\/h4>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The quick ratio focuses on your company\u2019s ability to meet short-term obligations using only your most liquid assets, excluding inventory.<\/li>\n\n\n\n<li>This conservative approach is excellent for assessing liquidity when your inventory cannot quickly convert to cash (like manufacturing or retail). It is a reliable indicator for industries where rapid access to cash is essential.<\/li>\n<\/ul>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-the-current-ratio-is-a-broader-view-of-assets\">The current ratio is a broader view of assets<\/h4>\n\n\n\n<ul class=\"wp-block-list\">\n<li>The current ratio, calculated as <strong>current assets \/ current liabilities<\/strong>, includes all current assets, like cash, receivables, and inventory.<\/li>\n\n\n\n<li>In inventory-heavy industries like retail or manufacturing, your current ratio may appear strong even when a significant portion of assets is tied up in stock.<\/li>\n<\/ul>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-what-a-difference-between-quick-and-current-ratios-could-mean\">What a difference between quick and current ratios could mean<\/h4>\n\n\n\n<ul class=\"wp-block-list\">\n<li>If you have high inventory levels, a high current ratio but a&nbsp;lower quick ratio can indicate potential liquidity risks if inventory takes time to sell.<\/li>\n\n\n\n<li>If inventory turnover slows, a lower quick ratio signals potential cash flow issues. In contrast, a <a href=\"https:\/\/www.sage.com\/en-ca\/blog\/what-is-just-in-time-inventory\/\" target=\"_blank\" rel=\"noreferrer noopener\">just-in-time inventory model<\/a> or reduced stock levels can improve cash flow and align these ratios more closely.<\/li>\n<\/ul>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-when-the-quick-and-current-ratios-are-the-same\">When the quick and current ratios are the same<\/h4>\n\n\n\n<ul class=\"wp-block-list\">\n<li>When the quick and current ratios are equal, it usually indicates minimal or no inventory\u2014common in-service industries like SaaS, where assets are liquid.<\/li>\n\n\n\n<li>This alignment often reflects efficient financial management, high liquidity, and an asset structure that supports swift responses to opportunities, which investors and creditors like.<\/li>\n<\/ul>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-cash-ratio-versus-quick-ratio\">Cash ratio versus quick ratio<\/h2>\n\n\n\n<p>The cash ratio measures your company\u2019s ability to cover short-term obligations using only cash and cash equivalents. <strong>Unlike the quick ratio, it excludes accounts receivable.<\/strong><\/p>\n\n\n\n<p><strong>Formula<\/strong><\/p>\n\n\n\n<p>Cash ratio = (cash + cash equivalents) \/ current liabilities<\/p>\n\n\n\n<p><strong>When to use<\/strong><\/p>\n\n\n\n<p>The cash ratio is ideal for assessing immediate liquidity without assuming future collections, but it may be too conservative for businesses that collect payments reliably, like SaaS or professional services.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-practical-applications-of-the-quick-ratio-in-business\">Practical applications of the quick ratio in business<\/h4>\n\n\n\n<p>The quick ratio is invaluable for creditors, investors, and executives like CFOs.<\/p>\n\n\n\n<p>Creditors use it to gauge a company\u2019s ability to repay loans, while investors gain insights into its short-term financial stability.<\/p>\n\n\n\n<p>Internally, you can use the quick ratio to assess liquidity, plan future expenditures, and identify opportunities to enhance cash flow.<\/p>\n\n\n\n<p><strong>Here\u2019s an example.<\/strong><\/p>\n\n\n\n<p>Imagine a mid-sized manufacturing firm.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>You review the quarterly financials and notice a dip in the quick ratio from 1.8 to 1.2.<\/li>\n\n\n\n<li>Recognizing this as a potential liquidity concern, you investigate further and find that increased accounts payable have temporarily strained your cash flow, although sales are steady.<\/li>\n\n\n\n<li>To counter this, you postpone some non-essential capital expenditures, freeing up liquid assets to improve the quick ratio.<\/li>\n<\/ul>\n\n\n\n<p>Here\u2019s how your numbers might look.<\/p>\n\n\n\n<p><strong>1. Previous quarter quick ratio calculation (1.8):<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Current assets (excluding inventory): $180,000<\/li>\n\n\n\n<li>Current liabilities: $100,000<\/li>\n\n\n\n<li>Quick ratio = 180,000\/100,000 = 1.8<\/li>\n<\/ul>\n\n\n\n<p><strong>2. Current quarter quick ratio calculation (1.2):<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Due to an increase in accounts payable, <strong>current liabilities <\/strong>have risen to $150,000, while <strong>current assets (excluding inventory)<\/strong> remain stable at $180,000.<\/li>\n\n\n\n<li>Quick ratio = 180,000\/150,000 = 1.2<\/li>\n<\/ul>\n\n\n\n<p><strong>3. Your action and impact<\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>To improve liquidity, you defer $30,000 in non-essential capital expenditure, increasing current assets (excluding inventory) to $210,000.<\/li>\n\n\n\n<li>The revised quick ratio = 210,000\/150,000 = 1.4<\/li>\n<\/ul>\n\n\n\n<p><strong>Through this proactive measure, you effectively improve your firm\u2019s quick ratio from 1.2 to 1.4, strengthening your short-term liquidity position and mitigating potential financial strain.<\/strong><\/p>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<figure class=\"wp-block-pullquote\"><blockquote><p>CFO tip: Set a quick ratio target<br><br>Establish a quick ratio benchmark for your business and track it monthly.<br>For example, set a target ratio of 1.2 or higher to comfortably meet short-term liabilities without relying on slower-moving assets like inventory.<\/p><\/blockquote><\/figure>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-the-power-of-the-quick-ratio-in-financial-analysis\">The power of the quick ratio in financial analysis<\/h2>\n\n\n\n<p>Traditionally, calculating the quick ratio was a manual process, where finance teams would pull data from various sources, including balance sheets and accounts, to gather current assets and liabilities.<\/p>\n\n\n\n<p>While the formula is straightforward, the time and effort needed to obtain and verify accurate figures to plug in were often substantial.<\/p>\n\n\n\n<p>This slow, manual approach could lead to outdated insights, making relying on the quick ratio for real-time financial decision-making challenging.<\/p>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-how-tech-can-boost-your-quick-ratio-analysis\">How tech can boost your quick ratio analysis<\/h4>\n\n\n\n<p>Modern financial technology (such as Sage Intacct) boosts the speed and accuracy of quick ratio analysis, supporting agile financial management.<\/p>\n\n\n\n<p>You could benefit from:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Real-time insight:<\/strong> automated tools reduce errors and offer up-to-date insights, helping you make immediate decisions.<\/li>\n\n\n\n<li><strong>Integrated data:<\/strong> cloud-based platforms can centralize financial data, making metrics like the quick ratio accessible and reliable.<\/li>\n\n\n\n<li><strong>Custom dashboards and alerts:<\/strong> track ratios over time and receive alerts for significant changes, allowing proactive liquidity management.<\/li>\n<\/ul>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<figure class=\"wp-block-pullquote\"><blockquote><p>CFO tip: Stay on top of accounts receivable<br><br>To maintain a healthy quick ratio, streamline your accounts receivable process with regular follow-ups and early payment incentives to keep liquidity strong.<\/p><\/blockquote><\/figure>\n\n\n\n<hr class=\"wp-block-separator has-alpha-channel-opacity\"\/>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-final-thoughts\">Final thoughts<\/h2>\n\n\n\n<p>The quick ratio is a strategic tool&nbsp;that offers insight into your company\u2019s liquidity and financial readiness. <\/p>\n\n\n\n<p>Regular monitoring gives you time to adjust spending, defer expenses, or focus on collections as needed.<\/p>\n\n\n\n<p>Set a quick ratio benchmark that aligns with industry standards to ensure your business is well-positioned for stability and growth.<\/p>\n\n\n\n<p><em>Editor&#8217;s note: This article was originally published in September 2023 and has been updated for relevancy.<\/em><\/p>\n\n\n<div class=\"single-cta\">\n\t<div class=\"single-cta__positioner\">\n\t\t<div class=\"single-cta__wrapper has-dark-background-color\">\n\t\t\t<div class=\"single-cta__content\">\n\t\t\t\t\t\t\t\t<h2 class=\"single-cta__title h3\">Subscribe to the Sage Advice Newsletter<\/h2>\n\n\t\t\t\t\t\t\t\t\t<div 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