Acid test ratio
Also known as the Quick ratio, the acid-test ratio is similar to the Current ratio but differs by excluding inventory and prepaid expenses, and by limiting assets to liquid assets such as cash and items that the business can quickly convert to cash.
The formula for the acid-test ratio is (Cash + Accounts Receivable + Short-term Investments) / Current Liabilities = Acid-test ratio
Lenders consider a business that has an acid-test ratio around 1.0 to be in good condition because, at this level, liquid (quick) assets approximately equal current liabilities.
From cash flow challenge to smart money management
90% of business failures are caused by cash flow problems. Discover how to go from having a cash flow challenge to smart money management.
