Quick Ratio

Measure your organization's ability to meet short-term financial obligations using assets that convert quickly to cash.

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Financial KPI Example - Quick Ratio Metric

What is Quick Ratio?

Quick Ratio measures your organization's ability to meet short-term financial obligations using assets that can be quickly converted into cash. This ratio offers a more conservative assessment of fiscal health than the current ratio because it excludes inventory, removing assets that may not convert to cash easily. A quick ratio greater than 1 means your business can meet its short-term obligations.

Quick Ratio formula

The formula for calculating Quick Ratio is:

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

Quick Ratio example

A company has the following financials:

  • Current assets: $6,877,756
  • Inventory: $1,500,000
  • Current liabilities: $438,332

Quick Ratio = ($6,877,756 - $1,500,000) / $438,332 = 12.27

This company can cover its current liabilities 12 times over using assets that convert quickly to cash.

Quick Ratio best practices

The two most effective ways to use Quick Ratio are for ongoing tracking and deeper analysis.

For tracking, take note of accounts on contract — these can skew the calculation and produce a misleadingly high ratio.

For analysis, segment the metric by business element (payment plan, business vertical, or customer cohort) to identify weaknesses in specific areas. Tightening up those weak spots will improve your overall score. Also consider examining the metric across different time periods: analyzing quarterly or yearly windows alongside monthly data can surface trends that prompt further investigation.

Key terms

  • Assets: An economic resource with a cash value.
  • Liability: A financial obligation stemming from previous transactions, such as a purchase order.

Success indicators

  • A Quick Ratio between 1.5 and 3.
  • A ratio that is greater than 1 and stable over the long term.

Quick Ratio challenges

For companies in their first year of business, Quick Ratio is less reliable. With new customers still in commitment periods, the ratio doesn't reflect a realistic picture of financial health. Early-stage companies are better served by tracking individual SaaS metrics until their customer base matures.

How to monitor Quick Ratio in real time

Once you have a process for measuring Quick Ratio, track it alongside other financial KPIs and metrics on a continual basis. A financial dashboard gives you a live view of this ratio and related indicators, so you can act on changes before they become problems.

Quick Ratio: top resources

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