Acid-Test Ratio

Acid Test Ratio

The acid test ratio (quick ratio) is a measure of your company's ability to pay for the short-term debts it has acquired. It's a quick way to tell if your firm is running itself too low on cash. It's a great tool to help monitor your company's financial health.

Step 1: Determine the value of all liquid assets from a current balance sheet.

(Include cash, marketable securities, and all receivables.)

Step 2: Look up the amount of current liabilities from your balance sheet.

Step 3: Calculate your acid-test ratio: Divide ìStep 1 into Step 2

Express your answer in the format of $x.xx.

Step 4: Look up your industry standard ratio from a source such as RMAís (Risk Management and Associates) Annual Statement Studies.

Step 5: Is your ratio higher or lower than the industry standard?

If you are higher:

This is a favorable indication of your ability to pay short-term debts.

Normally small business owners prefer the ratio to be $1.00 or higher.

A very high ratio could indicate poor receivables or excess cash reserves.

If you are lower:

You may experience problems paying short-term debts.

Consider liquidating some inventory to generate cash.

Investigate refinancing short-term debt with long-term debt.

Consider a sale/leaseback of fixed assets to generate cash.

Step 6: Based on your analysis of your acid test ratio, note three actions you can take:

1.

2.

3.