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Quick Ratio Calculation

Simple Alliance, Kenya Limited


Definition

The quick ratio, or the acid test ratio, is a financial ratio that determines a business’ short-range liquidity.  Essentially, the quick ratio would evaluate your business’ ability to pay off its current liabilities using its quick assets.

Quick Assets

Your quick assets are items such as:

  • Marketable securities
  • Accounts receivable
  • Cash
  • Cash equivalents

Function

The quick ratio performs a number of financial roles, such as:

  • Determining whether the business assets that could be quickly turned into cash are adequate to cater for your current liabilities
  • Telling a business’ current financial position
  • Helping you to compare your current status with your positions in past trading periods
  • Helping you to identify financial trends of your business  
  • Assisting you to identify the causes for any changes
  •  Helping you to identify and solve possible problems

Quick Ratio Formula

To arrive at your quick ratio figure, add up your accounts receivable, your marketable securities, and your cash. Divide the resulting figure with your current liabilities value. The relevant values are obtainable from your balance sheet.

Quick Ratio = (Accounts Receivable + Cash + Marketable Securities - Inventory)/Current Liabilities

= (Current Assets – Inventory )/ Current Liabilities

Principles

Certain basic standards guide quick ratio decisions. Some common principles include:

  • The general assumption that an ideal quick ratio figure is 1:1
  • The 1:1 quick ratio figure indicates that your business can cater for its present fiscal obligations using the existing quick monies  
  • A high quick ratio value is necessary if your business encounters difficulties borrowing short-range notes
  • A high quick ratio may compel your business to maintain excessive cash on hand
  • A high quick ratio could make your business to face difficulties when collecting its accounts receivable 
  • A less than 1:1 quick ratio value indicates that your business could be overlying on inventory and allied assets to settle its short-range financial obligations  

Uniqueness

The quick ratio is preferred by majority of lenders because its computation excludes inventory.  This exclusion is commendable because inventory could fail to be converted into cash through sales. Consequently, inventory is the asset with the least liquidity. A buyer has to be sought for inventory to turn into cash.  This process is not always easy. The omission of inventory makes the quick ratio a more thorough assessment of business liquidity than the current ratio.  

A Convenient Tool

So as to make your quick ratio computation more effective and accurate, we have created an automated calculator for your use. The calculator is in the below box with the heading Quick Ratio Calculator.  

Quick Ratio Calculator

Current Assets

 


Click on the "?" next to the input box for an item to get help on that item.

Current Inventory

 


Current Liabilities

 


Quick Ratio

 



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Using the Quick Ratio Calculator

Get the relevant financial figures from your business’ latest balance sheet. The required itesm include:

  • Current assets
  • Current inventory
  • Current liabilities

 On the Quick Ratio Calculator, key in the figures in their respective slots. Click on the ‘Calculate’ button. Your quick ratio value will appear in the relevant slot.  

Your business’ quick ratio figure determines the capacity for your business to meet short-range financial obligations. The ratio leaves out inventory since it is a less liquid asset. The quick ratio is thus a more precise measure of your business’ liquidity that the current ratio. Using the quick ratio formula, you undertake quick ratio calculation by subtracting inventory from quick assets. You then divide the resulting figure by your current liabilities. For convenience, you can use the above Quick Ratio Calculator.

Copyright (C) 2016, Simple Alliance Kenya Limited

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