Quick Ratio

The quick ratio or acid test is simply a liquidity test. It's another metric for letting a company know where it stands and how healthy it is financially. Now, this ratio certainly doesn't tell the whole story, but simply is a good metric to keep around when doing a financial check-up. If you don't know the formula off hand, then here it is:

Quick ratio = [cash and cash equivalents + marketable securities + accounts receivable] / current liabilities.

The quick ratio probably derives it's name from the fact that it deals with the assets that are readily avaiable to pay bills should they be needed. i.e. your warehouse and inventory don't count... but cash in the bank, stocks (in general), and accounts receivable can be used in this calculation.

Why are inventory and the warehouse left out of the picture? Well, if you had to use inventory to pay off a debt that was due immediately, whether that be the electric bill or debt, then you would probably have to sell at a discount in order to move the inventory quickly. Therefore, this isn't the best option and, regardless of the economic environment, selling even a small building can take time.

What is consider quick assets? Generally speaking, assets that you can turn into cash quickly without incurring a loss. That's why, going back to the previous example, things like inventory are left out of this calculation. I look at as a collection of your various forms of cash.

What to remember? Numbers, ratios, statistics, etc. aren't everything, but they're great tools in determining the financial health of a company. Therefore, however you accomplish this, know these numbers. Whether that's a CPA and/or your in-house software, make sure to check these numbers on a regular basis. This will help to avoid big issues from unexpectedly popping up.