Accounting Tips: Maintain a High Cash Ratio When Starting a New Business

By Craig Anthony

0 min read

The cash ratio is the most strict and conservative short-term liquidity ratio — the other two being the current ratio and quick ratio. The cash ratio refines a company’s liquidity by only measuring cash, cash equivalents, and highly liquid investments against current liabilities. The ratio ignores accounts receivables and inventories. It’s calculated as:

Cash ratio = (cash + cash equivalents + invested funds) / current liabilities

Assume a firm has $100,000 in cash, $40,000 in cash equivalents, $100,000 in invested funds, and $80,000 in current liabilities. The cash ratio is:

($100,000 + $40,000 + $100,000) / $80,000 = 3

This means that the company has $3 in cash and cash-like assets to cover every $1 in current liabilities. The higher the ratio the better. New small businesses should strive for higher ratios as it implies strength and some breathing room. A declining cash ratio is a sign of upcoming trouble.

References & Resources

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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