The quick ratio, also known as the acid test ratio, indicates a small business’s liquidity. This ratio compares the total amount of cash + accounts receivable + marketable securities against the total amount of current liabilities. This financial ratio is necessary for measuring the ability of a small business to quickly use all quick assets or near cash to retire its current liabilities straightaway.
For example, if your small business has total assets of $600,000 in cash + accounts receivable + marketable securities and current liabilities totaling $800,000, its quick ratio is 0.75 to 1. This is calculated as the current assets divided by current liabilities, or ($600,000 divided by $800,000 = 0.75).
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Generally, the higher the quick ratio, the greater the business’s liquidity. Better liquidity equates to more potential for a business to use liquid assets to meet their current liabilities and obligations.
Quick ratios different from current ratios as some current assets are specifically excluded from the quick ratio, but are included in the current ratio. The most notable current asset excluded from the quick ratio is inventory. Inventory is typically excluded from quick ratios as inventory can often take longer to be sold and turn to cash.
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