Over the next several blog entries we will be reviewing 5 financial ratios that can provide you insight into your business and how healthy it is. While the target for each of the ratios varies from industry to industry we are hopeful that the information will nevertheless be useful for you in understanding how your business can do more. We also have a FREE Business Health Check that we can complete for your business.
The Quick ratio lets a business know how well it is positioned to immediately pay off the debts that are due immediately. In accounting terms the calculation is:
Quick Ratio = (Cash + Marketable Securities + Receivables) / Current Liabilities
The ability to have a ratio that equals 1 means that for every $1.00 of Current Liabilities your business would have $1.00 of Cash and/or cash like liquidity.
Many banks and lenders look to see a 2:1 ratio. If your quick ratio is less than this it may mean:
– you are not collecting on accounts receivable quickly enough (or paying your bills to soon)
– your business is over leveraged
– your business is struggling to maintain sales or is not growing
Conversely, a quick ratio that is better than 2:1 could mean:
– quick inventory turn over
– receivables are collected in a short period of time
– solid sales
This ratio is one of many that you can use and in our experience, begins to tells us many things about a SME business. In the next blog we review the current ratio which is very similar to the quick ratio covered here.