When you enter your actuals from your accounting solution into the Scoreboard, you can view two ratio metrics to help you assess the health of your business:
This metric helps you estimate your company’s ability to pay off its outstanding bills and short-term debt. In other words, it tells you whether your company has enough cash and accounts receivable to pay the debts that are due within the next 12 months.
Here are some examples of quick ratios:
- A quick ratio of 1.0 indicates that a business has just enough cash available to pay off its short-term debts.
- A company with a quick ratio of 2.0, on the other hand, has $2.00 of cash/liquid assets available to cover every $1.00 of current liabilities. A company in this situation has twice as much cash/liquid assets it needs to cover its short-term debt.
- On the other end of the spectrum, a company with a quick ratio of .5 only has fifty cents to cover each $1.00 of its short-term debt. This ratio can spell disaster if the debts suddenly become due and payable.
Quick ratio is very similar to Current ratio (below). However, quick ratio doesn’t include inventory in the assets you could potentially use to pay off your debts - this is because inventory can be difficult to sell quickly for cash. As a result, the quick ratio is a more conservative estimate of how easily your company could pay off its short-term debts.
Just like the quick ratio, the current ratio metric tells you if your company has enough cash and accounts receivable to pay debts that are due within the next 12 months.
As mentioned above, the current ratio also includes inventory as part of the liquid assets you could use to pay off short-term debt. The examples of quick ratio would be the same for the current ratio - a ratio of greater than 1.0 is the best-case scenario.
The current ratio is a less-conservative estimate of how easily your company could pay its short-term debt. If your inventory is difficult to liquidate quickly, then the quick ratio may be a more usable metric.