Quick Ratio / Acid Test

Overview

Quick Ratio measures the ability of your organization to meet any short-term financial obligations with assets that can be quickly converted into cash. This ratio offers a more conservative assessment of your fiscal health than the current ratio because it excludes inventories from your assets. Like your current ratio, a quick ratio greater than 1 indicates that your business is able to pay off all of your accounts payable.

The quick ratio gets its name from the fact that it demonstrates your ability to quickly generate cash to pay off your financial obligations. The reason inventory is excluded from this ratio is that it's assumed that you may not be able to quickly convert your inventory into cash. Quick ratio is an important financial measure, but may not give you the complete picture. For example, your organization may have a large amount in account receivables causing your quick ratio to be low while your financial health is actually quite strong.

Key terms

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

Success indicators

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