Quick Ratio

How financially safe is your business? If you had a bad month, would you still be able to cover your short term financial obligations?

Investors are interested in this question, and you should be too. The quick ratio provides a glimpse into whether you have enough liquid assets to cover short-term obligations. You should be aware of this metric so you can take steps to improve it if necessary.

At GEPC, we can help you understand the role that this ratio has in your business. It’s time to take charge of your finances.

what is it?

This metric specifies the ratio of quick assets to current liabilities within a business. Quick assets refer to assets that can be converted to cash within ninety days (cash, current A/R, short-term investments, etc.). They are also referred to as ‘liquid’ assets. 

Ratios over one are preferred, as this indicates having more quick assets than current liabilities. It means the business will be able to pay off current liabilities and debts with ‘cash’ they have on hand. 

how does it impact your business?

This ratio indicates how ‘safe’ a company is. Businesses with a ratio over one are capable of paying off current liabilities without having to sell long-term assets. Businesses want to hold onto their long-term and capital assets since they are typically revenue-generators. Long-term assets remain useful for lengthy periods of time (over a year) and are typically used in the production process. A great majority of fixed assets are subject to depreciation. An example would be a piece of machinery, or the factory it’s housed in.  

Investors and creditors want to invest in businesses that are financially healthy and able to pay back their debts without having to sell important assets. It’s less risky for them. For this reason, businesses should strive for a favorable quick ratio.

ready to take action?

There are a few different options to increase the ratio. Inventory can be reduced by selling the product, which would increase either current A/R or cash (both of which are liquid assets). Short-term liabilities can also be converted to long-term liabilities, and/or fixed assets can be converted to liquid assets.

Want More Information? 

Schedule a free consultation at gregevans.ca or (705) 880-2224 to learn more about what we have to offer. It all starts with a conversation.