Quick ratio: Formulas, definitions, and tips for 2025

Did you know that nearly 1 in 4 small businesses face cash flow challenges each year? This common struggle often stems from not having a clear picture of short-term financial health, making it harder to pay bills on time or cover unexpected expenses. That’s why understanding and managing liquidity is crucial for maintaining financial stability.

The quick ratio formula is quick assets divided by current liabilities. It’s also known as the acid-test ratio and is worth learning—no matter your industry. The quick ratio helps you track your liquidity, which is your ability to pay bills in the short term. The quick ratio can help you avoid cash flow problems and maintain good relationships with creditors and suppliers.

This article will explain how to calculate the quick ratio and provide tips on improving liquidity.

• What is the quick ratio?
• Key components of the quick ratio
• Quick ratio example
• Quick ratio vs. current ratio: Which is better?
• Quick ratio: Advantages and disadvantages
• Why the quick ratio is important + use cases
• What is a good quick ratio?
• Industry benchmarks for a quick ratio
• How do you improve your quick ratio
• Quick ratio vs. cash ratio: Key differences
• Limitations of the quick ratio in real-world use
• Your toolkit for managing liquidity

What is the quick ratio?

The quick ratio formula is a company's quick assets divided by its current liabilities. It’s a financial ratio measuring your ability to pay current liabilities with assets that quickly convert to cash.

Quick assets = cash + cash equivalents + marketable securities + accounts receivable

Quick assets are current assets that you can convert into cash within 90 days. Current liabilities are obligations due within 12 months.

Generally, the higher the ratio, the better the liquidity position. A quick ratio of 1.0 means that for every $1 a company has in current liabilities, it also has $1 in quick assets.

For example: If a company has $1,000 in current liabilities on its balance sheet. But also has $1,500 in quick assets, so its quick ratio is 1.5, or $1,500 / $1,000.

Here’s why the quick ratio is a useful measure of financial health:

• More conservative: The quick ratio provides a more immediate view of a company's ability to cover short-term debts with its most liquid assets.
• Excludes inventory: It doesn't rely on the assumption that inventory can be quickly sold.
• Better for short-term view: A company gets a clearer picture of its ability to handle immediate obligations.

Key components of the quick ratio

The quick ratio comprises quick assets and current liabilities. Quick assets are assets a company expects to convert to cash in 90 days or less. Current liabilities are obligations the company will need to pay within the next year.

Quick assets

Quick assets include cash, cash equivalents, receivables, and securities, but will exclude inventory since it’s unclear when it will sell and at what price.

Current assets are assets that can be converted to cash within a year or less. It includes quick assets and other assets that might take months to convert to cash, such as inventory and prepaid expenses.

Cash, cash equivalents, and marketable securities are a company's most liquid assets. These include anything convertible to cash almost immediately, such as bank balances and checks.

Marketable securities are short-term assets that can take a few days to turn into cash. Examples of marketable securities include stocks and money market funds.

Accounts receivable (A/R) is the money that customers owe you. These assets are less liquid than cash and marketable securities. But companies still expect to receive the money within 90 days.

Current liabilties

Current liabilities represent financial obligations due within a year. This can include unpaid invoices you owe and lines of credit you have balances on. Pretty much any payable you have will be a current liability.

Accounts payable, or trade payables, reflect how much you owe suppliers and vendors for purchases. Current liabilities will also include short-term debt. For example, if you have a five-year loan for a vehicle, the next 12 months of payments will be a current liability.

Current liabilities include:

• Accounts payable
• Salaries and wages payable
• Taxes payable
• Short-term debt

Quick ratio example

Let’s look at an example of the quick ratio in action to understand how it works and what the formula can reveal. Here’s an example of a company’s balance sheet that your accounting software could produce:

To calculate the quick ratio, we need the quick assets and current liabilities.

Quick assets from the example balance sheet are:

• Cash $1,000
• Cash equivalents $500
• Marketable securities $1,300
• Accounts receivable $1,600
• Total quick assets $4,400

The current liabilities are:

• Accounts payable $1,800
• Prepaid expenses $600
• Short-term loans $1,000
• Taxes payable $600
• Total current liabilities $4,000

The quick ratio in this example is 1.1, or $4,400 / $4,000. This means the business has $1.10 in quick assets for every $1 in current liabilities.

Quick ratio vs. current ratio: Which is better?

One ratio is not inherently better than the other; it really depends on your specific requirements and the context of your analysis.

The quick ratio is more suitable if you're looking for a quick evaluation of your company's ability to meet immediate obligations. However, the current ratio is better for a broader view of your overall liquidity over a more extended period. To fully understand your company's financial health, analyzing both ratios together is ideal.

The quick ratio and current ratio are both accounting formulas that business owners can use to understand liquidity. However, they differ in their approach and financial health perspectives.

Current radio characteristics

The current ratio is a broader measure of liquidity, calculated as: Current Ratio = Current Assets / Current Liabilities

Here are a few ways it differs from the quick ratio:

• More inclusive: It considers all current assets, including inventory, providing a broader view of liquidity.
• Less conservative: The current ratio assumes inventory can be sold to cover debts, which might not always be the case.
• Better for long-term view: A company can use the current ratio for a more comprehensive assessment of its overall liquidity position.

Quick ratio: Advantages and disadvantages

The quick ratio is a valuable tool for assessing your company's short-term liquidity, but like any financial metric, it has advantages and disadvantages.

Quick ratio advantages

• Early warning sign: A low quick ratio can be a red flag for potential cash flow problems, allowing for proactive measures to improve liquidity.
• Easy to calculate: Calculating the quick ratio is straightforward, using readily available information from the balance sheet.
• Industry comparison: It can be used to compare a company's liquidity to industry averages or competitors.

Quick ratio disadvantages

• Limited: The quick ratio provides a limited scope since it only considers some current assets, potentially overlooking other sources of liquidity like credit lines or readily marketable securities.
• Doesn't reflect future cash flow: It's a static measure based on a snapshot in time and doesn't account for future cash inflows or outflows.
• Doesn't consider the quality of assets: The quick ratio doesn't assess the quality of accounts receivable, which could be difficult to collect. For example, if a company has a lot of accounts receivable, but many of those customers are unlikely to pay, those receivables are considered low quality because they might not actually turn into cash.

Why the quick ratio is important + use cases

Small businesses are prone to unexpected financial hits that can disrupt cash flow. If there’s a cash shortage, you may have to dig into your personal funds to pay employees, lenders, and bills.

As a small business owner, tracking liquidity is important: It's your responsibility to ensure the company meets its financial commitments. Lenders also use the quick ratio to track liquidity when assessing creditworthiness.

The quick ratio is easy to calculate and can give you a quick snapshot of liquidity. It’s best for:

Comparing

Quick ratios are useful when measuring your business against industry standards or peers. This gives you a realistic target to aim for and helps you see whether your liquidity is strong or lagging behind. If you find your ratio is lower than that of your competitors, it’s a signal to adjust how you manage cash, debt, or short-term obligations.

Decision-making

Liquidity levels can guide smarter financial decisions. For example, a healthy quick ratio might give you confidence to invest in new equipment or expand operations. On the other hand, if your ratio is weak, you may hold off on purchases or negotiate better payment terms with vendors to protect cash flow.

Planning

Adjusting your cash flow to improve the quick ratio ensures you can meet obligations without selling off assets in a rush. This makes planning for growth easier since you’ll know your business can handle short-term shocks while still funding future projects. 

Small steps, like speeding up customer payments or reducing reliance on short-term debt, can strengthen your ratio over time.

What is a good quick ratio

A quick ratio above 1.0 indicates a company has enough quick assets to cover its current liabilities. A higher ratio indicates that the company has more liquidity and financial flexibility.

Here’s a quick ratio guide for determining a good quick ratio:

• Less than 1: Unhealthy
• 1 to 1.5: Healthy
• 1.5 to 3: Very healthy
• Over 3: Questionable

A very high quick ratio, such as three or above, is not always good. Such a high quick ratio means there’s too much cash in the bank. This means the company is missing growth opportunities.

Note that while a quick ratio of one is generally good, whether your ratio is good or bad will depend on your industry.

Due to different characteristics, some industries may have an average quick ratio that seems high or low.

A couple of examples of how quick ratios can vary include:

• A retail business may have a lower quick ratio than a service business. That's because retailers have more inventory and lower accounts receivable.
• Due to fluctuations in its cash flow and liabilities, a seasonal business may have a higher or lower quick ratio at different times of the year.

It’s important to compare a company's quick ratio with its peers. But also with your own historical performance. This will give you a better understanding of your liquidity and financial health.

The ideal liquidity ratio for your small business will balance a comfortable cash reserve with efficient working capital.

Industry benchmarks for a quick ratio

The “right” quick ratio depends on your industry. Some businesses need higher liquidity because they face unpredictable cash cycles, while others can operate comfortably with less. Comparing your ratio against industry benchmarks helps you understand whether your liquidity is healthy or needs improvement.

If your ratio falls below the typical range for your industry, it may be a red flag to improve cash flow or reduce short-term debt. It could signal financial strength if it’s above average, but cash may also be sitting idle instead of fueling growth.

Retail

Retail businesses often operate with thin margins and higher inventory levels, which the quick ratio excludes. As a result, it’s common for retailers to have a quick ratio between 0.4 and 0.7. A lower ratio doesn’t always signal trouble, as steady cash flow from daily sales helps cover short-term liabilities.

Manufacturing

Manufacturers usually invest more cash in inventory and equipment, which can lower their quick ratios than service-based businesses. A quick ratio of around 0.8 to 1.0 is typical. Anything consistently below that may indicate overstocked inventory or tight cash reserves.

SaaS and service-based businesses

Service companies and SaaS providers don’t carry much inventory, often leading to stronger liquidity. Quick ratios of 1 to 4 are common, with some software firms maintaining even higher levels to reassure investors and lenders.

How do you improve your quick ratio?

Making sure your business has enough liquidity means improving your quick ratio—there are three ways to do that:

1. Increase your cash

You do this by growing your sales or reducing expenses. While drawing from a credit line or taking a short-term loan will increase your cash, it also increases your current liabilities. Meaning it does not benefit your quick ratio.

2. Decrease your inventory

Inventory is one of the least liquid assets. But if you sell out-of-date inventory, it can boost your cash holdings—and your quick ratio. Spending cash or using credit on unnecessary inventory can hurt your liquidity. 

Improving your inventory management with an inventory analysis can also help reduce your current liabilities.

3. Decrease your current liabilities

If short-term obligations are overwhelming, you can renegotiate the terms with creditors or lenders. Consolidating high-interest short-term debt or setting up payment plans can reduce immediate pressure. Even minor adjustments can improve your quick ratio and free up cash for operations.

4. Speed up collections

Collecting payments faster strengthens your cash position and improves your quick ratio. You can do this by offering discounts for early payments, tightening credit terms, or following up on overdue invoices more quickly. The less time cash is tied up in accounts receivable, the stronger your liquidity becomes.

5. Negotiate supplier terms

Extending your payment deadlines—without incurring penalties—gives you more flexibility to manage cash flow. Negotiating better terms with suppliers can reduce pressure from short-term obligations, making it easier to maintain a healthier quick ratio while keeping your operations running smoothly.

6. Use technology

Modern accounting and inventory management tools give you real-time insight into your cash position and liabilities. By automating invoice reminders, monitoring payment trends, and tracking inventory levels, you can make smarter decisions that directly improve your quick ratio.

Quick ratio vs. cash ratio: Key differences

Both the quick ratio and the cash ratio measure a company’s liquidity, but the cash ratio takes a stricter approach.

When measuring a company's ability to pay off current liabilities, the cash ratio only includes cash and cash equivalents, such as bank balances and marketable securities. It excludes accounts receivable and inventory, making it the most conservative test of liquidity.

Because the cash ratio ignores receivables, it provides a “worst-case scenario” view of liquidity, while the quick ratio gives a more practical picture of near-term solvency.

• Quick ratio: Includes cash, cash equivalents, and accounts receivable.
• Cash ratio: Includes only cash and cash equivalents.

When to use each ratio

Use the quick ratio to evaluate short-term liquidity under normal operating conditions, where collecting receivables is realistic.

Use the cash ratio when your business faces high uncertainty, tighter credit conditions, or when lenders and investors want to see the company’s ability to meet obligations immediately without relying on receivables.

Why both matter

The quick ratio is a useful benchmark for everyday financial analysis, but the cash ratio adds another layer of insight. If your cash ratio is low but your quick ratio is strong, it may signal reliance on receivables that could take time to convert into cash. Monitoring both ensures a balanced view of your liquidity health.

Limitations of the quick ratio in real-world use

The quick ratio is a helpful liquidity metric, but it has limits when applied to real business situations. Relying on it alone can give an incomplete picture of financial health.

It is most valuable when compared to other financial metrics. Pairing it with measures like the current ratio, cash ratio, and profitability indicators gives you a more reliable view of your business’s financial health.

Seasonal fluctuations

For seasonal businesses, the quick ratio can swing dramatically depending on the time of year. A strong ratio during peak season may overstate liquidity, while a low ratio in the off-season may understate it.

Dependence on receivables

Accounts receivable are included in the quick ratio but aren’t guaranteed cash. If customers delay payments or default, the ratio can look stronger than the company’s actual liquidity. Businesses with long collection cycles or high credit risk should be cautious about overestimating their financial flexibility.

Ignoring profitability

A healthy quick ratio does not always mean the business is financially sound. A company may have strong liquidity but still struggle if it is not profitable in the long term. Evaluating cash flow, margins, profitability, and liquidity ratios provides a more complete financial picture.

Your toolkit for managing liquidity

Improving your business's quick ratio can make it easier to access funds and manage your financial obligations. But the quick ratio may not capture the profitability or efficiency of the company. Use it alongside other financial ratios and reports.

It’s easy to calculate the quick ratio formula and run financial reports with QuickBooks accounting software. Its cloud-based system tracks all your financial information and gives you fast access to your current assets and liabilities. You can spend less time running the numbers and more time driving success.