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:
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The Oregon Small Business Development Center Network’s funding partners
include sixteen community colleges, three regional universities,
the U.S. Small Business Administration and the Oregon Economic & Community Development Department.
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