The formula
The quick ratio is the business question in one number: can the business pay the bills due in the next year without selling a single thing off the shelves. Take the business’s current assets — what it can turn into cash within a year — subtract the inventory, and divide by its current liabilities, what it must pay within a year. A quick ratio of 1.10 means the business holds $1.10 of quick assets for every $1.00 of short-term bills. This guide works it in seven steps.
Step 1 — Add up the current assets
Start with what the business can turn into cash within a year: the cash in the bank, the accounts receivable, the inventory on the shelves and any short-term investments. Add them together — that is the current assets. Leave out the long-term assets: the building, the equipment and the vehicles. On the worked example the current assets are $150,000.00.
Step 2 — Take out the inventory
Now subtract the inventory from the current assets. That is the quick assets — what the business can turn into cash fast: cash, accounts receivable and short-term investments. Inventory stays out because it can take months to sell and may have to be discounted. On the worked example the inventory is $40,000.00, so the quick assets are $150,000.00 − $40,000.00 = $110,000.00.
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 $100,000.00.
Step 4 — Divide the quick assets by the liabilities
Divide the quick assets by the current liabilities. That is the quick ratio. On the worked example it is $110,000.00 ÷ $100,000.00 = 1.10. The business holds $1.10 for every $1.00 of short-term bills, so it clears the 1.00 bar with $0.10 to spare. Rounded to two decimals: 1.50 with no inventory, 0.70 with $80,000.00, and 0.40 with $110,000.00.
Step 5 — Work out the assets the bar needs
Multiply the target ratio by the current liabilities, then add the inventory back, to find the current assets the business must hold. On the worked example the target is 1.00, so the assets needed are 1.00 × $100,000.00 + $40,000.00 = $140,000.00. At the 1.50 bar they are 1.50 × $100,000.00 + $40,000.00 = $190,000.00, and at the 1.25 bar they are 1.25 × $100,000.00 + $40,000.00 = $165,000.00.
Step 6 — Work out the most liabilities the bar allows
Divide the quick assets by the target ratio to find the most current liabilities the bar allows. On the worked example it is $110,000.00 ÷ 1.00 = $110,000.00. At the 1.50 bar it is $110,000.00 ÷ 1.50 = $73,333.33. This is how a lender sizes the room: the most the business can owe while staying above the bar.
Step 7 — Check the result against the 1.00 bar
Compare the ratio with the 1.00 bar: on the worked example the ratio is 1.10, so the business clears the bar with $0.10 of headroom. Check it: $110,000.00 ÷ $100,000.00 = 1.10, the quick ratio, and $110,000.00 + $40,000.00 = $150,000.00, the current assets. One warning: the reverses are judged on the UNROUNDED ratio — at $139,999 the unrounded ratio is 0.999990, shown as 1.00 only after rounding, still below the line.
Three worked examples
The headline example: $150,000.00 of current assets, $40,000.00 of inventory and $100,000.00 of current liabilities. The quick assets are $150,000.00 − $40,000.00 = $110,000.00, the ratio is $110,000.00 ÷ $100,000.00 = 1.10, and the current assets needed at the 1.00 bar are $140,000.00. No inventory instead: the quick assets are $150,000.00 and the ratio is 1.50, the same as the current ratio. Current liabilities of $50,000.00 instead: the ratio is 2.20. Use the quick ratio calculator for your own numbers.
Two reverses to check your answer
The smallest whole-dollar current assets for the ratio to reach 1.00 is $140,000 — at $140,000 the ratio is 1.00, and at $139,999 the unrounded ratio is 0.999990, shown as 1.00 only after rounding, still below the line. The largest whole-dollar inventory for the ratio to STAY at or above 1.00 is $50,000 — at $50,000 the ratio is 1.00, and at $50,001 the unrounded ratio is 0.999990, shown as 1.00 only after rounding, still below the line.
What counts as quick assets, and what does not
Quick assets are what the business can turn into cash fast: cash, accounts receivable and short-term investments. Inventory stays out — it can take months to sell and may have to be discounted — and so do prepaid expenses and long-term assets: a prepaid premium is already spent, and the building and equipment are not due in the next year. The trap is the receivables: the ratio counts them at face value, but bills that never get paid are not cash, and a lender will discount them.
Why inventory is excluded
Inventory is the slowest current asset to turn into cash. Cash is cash, receivables are usually paid in 30 to 60 days, and short-term investments sell in a day — but inventory has to be sold first, and a sale that never happens is not an asset. That is why the quick ratio strips it out: it asks whether the bills are covered if nothing sells.
What to do below 1.00
A ratio below 1.00 means the business holds less than $1.00 of quick assets for every $1.00 of short-term bills — it is leaning on selling inventory to pay them. On $150,000.00 of current assets, $80,000.00 of inventory and $100,000.00 of current liabilities the ratio is 0.70 and the quick assets are $70,000.00. The fixes are the formula’s three levers: raise quick assets, cut liabilities, or cut inventory. Collect receivables faster, put in cash, sell slow inventory, or pay down short-term debt. The smallest whole-dollar current assets that reach 1.00 are $140,000 — at $139,999 the unrounded ratio is 0.999990, shown as 1.00 only after rounding, still below the line.
What a ratio above 2.00 means
A ratio above 2.00 does not mean twice as safe — it may mean idle cash the business could put to work. On $150,000.00 of current assets, $40,000.00 of inventory and $50,000.00 of current liabilities the ratio is 2.20 and the quick assets are $110,000.00. Cash in the bank earns little, and unpaid receivables earn nothing. The 1.00 bar is the line for covering the bills; above 2.00, the question is whether the assets are working.
How the quick ratio differs from the current ratio
The current ratio is current assets divided by current liabilities — inventory included. The quick ratio takes the inventory out first. On the worked example the current ratio is 1.50 and the quick ratio is 1.10 — the $40,000.00 of inventory is the whole gap. The current ratio answers whether the bills are covered if everything sells; the quick ratio answers whether they are covered if nothing sells.