The formula
The cash ratio is the business question in one number: can the business pay the bills due in the next year with cash alone, without selling a single thing and without collecting a single invoice. Take the business’s cash, add the cash equivalents, and divide by its current liabilities, what it must pay within a year. A cash ratio of 0.60 means the business holds $0.60 of cash for every $1.00 of short-term bills. This guide works it in seven steps.
Step 1 — Add up the cash
Start with the cash in the bank: the checking and savings accounts, the petty cash, the cash on hand. Add it together — that is the cash. On the worked example the cash is $120,000.00.
Step 2 — Add up the cash equivalents
Now add the cash equivalents: short-term investments that turn into cash within 90 days — Treasury bills, money-market funds, commercial paper. Add them to the cash — that is the liquid cash. On the worked example the cash equivalents are $30,000.00, so the liquid cash is $120,000.00 + $30,000.00 = $150,000.00.
Step 3 — Add up the current liabilities
Now add up what the business must pay within a year: the accounts payable, the short-term debt and the accrued expenses. That is the current liabilities. Do not include the long-term debt: a mortgage or a five-year loan stays out. On the worked example the current liabilities are $250,000.00.
Step 4 — Divide the liquid cash by the liabilities
Divide the liquid cash by the current liabilities. That is the cash ratio. On the worked example it is $150,000.00 ÷ $250,000.00 = 0.60. The business holds $0.60 for every $1.00 of short-term bills, so it is $100,000.00 short of full coverage.
Step 5 — Work out the cash the target needs
Multiply the target ratio by the current liabilities, then subtract the liquid cash, to find the cash the business must hold. On the worked example the target is 1.00, so the cash needed is 1.00 × $250,000.00 − $150,000.00 = $100,000.00. At the 0.50 target it is $0.00 — the liquid cash already exceeds 0.50 × $250,000.00 = $125,000.00 by $25,000.00.
Step 6 — Work out the most liabilities the target allows
Divide the liquid cash by the target ratio to find the most current liabilities the target allows. On the worked example it is $150,000.00 ÷ 1.00 = $150,000.00. At the 0.50 target it is $150,000.00 ÷ 0.50 = $300,000.00.
Step 7 — Check the result against the 1.00 target
Compare the ratio with the 1.00 target: on the worked example the ratio is 0.60, so the business is $100,000.00 short of full coverage. Check it: $150,000.00 ÷ $250,000.00 = 0.60, the cash ratio, and $150,000.00 + $100,000.00 = $250,000.00, the current liabilities. One warning: the reverses are judged on the UNROUNDED ratio — at $219,999 the liquid cash is $249,999.00, $1 short of the $250,000 needed, and the unrounded ratio is 0.999996, shown as 1.00 only after rounding.
Three worked examples
The headline example: $120,000.00 of cash, $30,000.00 of cash equivalents and $250,000.00 of current liabilities. The liquid cash is $120,000.00 + $30,000.00 = $150,000.00, the ratio is $150,000.00 ÷ $250,000.00 = 0.60, and the cash needed at the 1.00 target is $100,000.00. Current liabilities of $150,000.00 instead: the ratio is 1.00 — exactly full coverage. Cash of $200,000.00 instead: the liquid cash is $230,000.00 and the ratio is 0.92. Use the cash ratio calculator for your own numbers.
Two reverses to check your answer
The smallest whole-dollar cash for the ratio to reach 1.00 is $220,000 — at $220,000 the ratio is 1.00, and at $219,999 the liquid cash is $249,999.00, $1 short of the $250,000 needed. The largest whole-dollar current liabilities for the ratio to STAY at or above 1.00 is $150,000 — at $150,000 the ratio is 1.00, and at $150,001 the liquid cash is $1 short of the $150,000 needed for full coverage.
What counts as cash equivalents, and what does not
Cash equivalents are what the business can turn into cash within 90 days: Treasury bills, money-market funds and commercial paper. What does not count: accounts receivable — a bill that has not been paid yet is not cash; inventory — stock on a shelf can take months to sell; and prepaid expenses — a prepaid premium is already spent. The trap is the receivables: the quick ratio counts them at face value, but bills that never get paid are not cash, and the cash ratio leaves them out entirely.
Why the cash ratio is the strictest test
The cash ratio is the strictest of the liquidity ratios because it counts only what a business could hand over tomorrow. The current ratio counts everything the business can turn into cash within a year, including inventory. The quick ratio takes the inventory out but still counts the receivables. The cash ratio takes those out too: no selling, no collecting, just the cash. That is why lenders read it alongside the other two — it shows the worst-case cushion.
What to do below target
A ratio below target means the business holds less than the target in cash for every $1.00 of short-term bills — on the worked example it holds $0.60, and it is $100,000.00 short of full coverage. The fixes are the formula’s three levers: raise the liquid cash, cut the liabilities, or both. Collect receivables faster, put in cash, sell slow inventory, or pay down short-term debt. Hold a cash buffer: the 0.50–1.00 healthy range is the line most businesses aim for. The smallest whole-dollar cash that reaches 1.00 is $220,000 — at $219,999 the liquid cash is $249,999.00, $1 short of the $250,000 needed.
What a ratio above 1.00 means
A ratio above 1.00 does not mean twice as safe — it may mean idle cash the business could put to work. On $220,000.00 of cash, $30,000.00 of cash equivalents and $250,000.00 of current liabilities the ratio is 1.00 and the liquid cash is $250,000.00. On $120,000.00 of cash, $30,000.00 of cash equivalents and $100,000.00 of current liabilities the ratio is 1.50 and the liquid cash is $150,000.00. The 1.00 target is the line for covering the bills; above 1.00, the question is whether the cash is working.
How the cash ratio differs from the current ratio and the quick ratio
The current ratio is current assets divided by current liabilities — cash, receivables and inventory included. The quick ratio takes the inventory out first, but still counts the receivables. The cash ratio takes the receivables out too: cash and cash equivalents only. On the worked example the cash ratio is 0.60 — the strictest test. The current ratio answers whether the bills are covered if everything sells; the quick ratio answers whether they are covered if nothing sells; the cash ratio answers whether they are covered with cash alone.