What is a quick ratio?
Also called the acid test ratio, a quick ratio is a conservative measure of your firm's liquidity because it uses a fraction of your current assets. Unlike current ratio, quick ratio calculations only use quick assets or short-term investments that can be liquidated to cash in 90 days or less.
What is included in the quick ratio?
You'll include cash and cash equivalent, accounts receivable, and marketable securities in your quick ratio calculations. Typically, you eliminate inventory and prepaid expenses when calculating quick ratios because you can't convert them into cash in 90 days.
However, the current liabilities remain the same and include: short-term debt, accrued liabilities, and accounts payable.
Quick ratio formula
While the quick ratio formula uses current liabilities, it scales down the assets to accommodate the short timeframe, usually about three months.
Quick Ratio = (Cash + Cash Equivalents + Liquid Securities + Receivables) ÷ Current Liabilities
From the example above, a quick recalculation shows your firm now holds $150,000 in current assets while the current liabilities remain at $100,000.
The firm's quick ratio is : 150,000 ÷ 100,000 = 1.5
After removing inventory and prepaid expenses, your business has $1.5 in assets for every dollar in liabilities, which is a great ratio.
What is a good quick ratio for a company?
A quick ratio above one is excellent because it shows an even match between your assets and liabilities. Anything less than one shows that your firm may struggle to meet its financial obligations.
If the quick ratio is too high, the firm isn't using its assets efficiently. While this formula offers insights into virtually any business vertical, it doesn't adequately describe the SaaS model.