This Hollygrove Lenders worksheet shows Fort Pierce, Florida owners how to calculate the acid-test, or quick, ratio by hand: what it measures, which assets count as quick, which bills count as current liabilities, a line-by-line table, a worked tile contractor example, how it differs from the current ratio, what a low ratio says about a line of credit request and how to raise it.
What the Acid-Test Ratio Measures
The acid-test ratio, also called the quick ratio, asks one question: if every bill due within the next year came due today, could the business pay it from cash and money already owed to it? Stock on the shelf does not count, because it must be sold first.
A ratio of 1.0 means quick assets exactly cover current liabilities. Above 1.0, there is a cushion; below it, the business depends on selling stock or on new revenue to pay its bills. The ratio is a snapshot, not a forecast: it says nothing about next month's sales, only about what is on hand and owed right now. Working it out every month, from the same lines, shows whether liquidity is improving or slipping.
Quick Assets: Cash, Receivables and Marketable Securities, Not Inventory
- Cash in business bank accounts.
- Marketable securities that can be sold quickly, if the business holds any.
- Accounts receivable: invoices customers owe, net of amounts unlikely to be collected.
Inventory, prepaid expenses and equipment are left out. Retainage held by a general contractor until a job closes is a receivable, but it may not be collected soon; some owners leave it out to be conservative.
Current Liabilities: The Bills Due Within a Year
- Accounts payable to suppliers.
- Credit card balances and lines of credit drawn.
- Payroll and payroll taxes owed.
- The portion of longer loans due within the next twelve months.
- Sales tax collected and not yet remitted.
The balance sheet's current liabilities line gathers these. If the business has no balance sheet, list them from statements and loan schedules.
Working the Ratio Line by Line
| Line | What to enter | Source |
|---|---|---|
| 1. Cash | All business bank balances | Bank statements |
| 2. Marketable securities | Investments that can be sold quickly | Investment account statements, if any |
| 3. Receivables | Invoices owed, less doubtful ones | Aging report |
| 4. Quick assets | Line 1 + line 2 + line 3 | Arithmetic |
| 5. Current liabilities | Bills and debt due within a year | Balance sheet or statements |
| 6. Acid-test ratio | Line 4 divided by line 5 | Arithmetic |
Use balances from the same date for every line. A ratio built from a month-end bank balance and a mid-month payables total can mislead. Month-end is the usual choice, since bank statements and supplier statements close then, but a business with a large payroll on the first of the month should note it, because the ratio the day before payroll looks stronger than the ratio the day after.
A Tile Contractor's Ratio With Invented Balances
Illustration only, invented balances: a tile contractor holds $38,000 in cash, no securities and $64,000 in receivables, so quick assets are $102,000 (our arithmetic). Its invented current liabilities are $81,000. The invented acid-test ratio is $102,000 divided by $81,000, about 1.26 (our arithmetic).
The contractor also holds $22,000 of tile and setting materials in its invented example, which the acid-test leaves out. The quick assets cover the bills with a modest cushion, provided the receivables are collected on time.
Acid-Test Ratio vs Current Ratio for a Shop Carrying Stock
The current ratio adds inventory and other current assets to the top line. For the invented tile contractor, the current ratio is $124,000 divided by $81,000, about 1.53 (our arithmetic). The gap between the two ratios shows how much of the cushion sits in stock.
For a store or parts counter carrying heavy stock, the gap can be wide. A partner funding inventory financing reads both ratios and how fast the stock turns.
What a Low Ratio Says About a Line of Credit Request
A low acid-test ratio means bills due soon exceed the cash and receivables to pay them. A partner reading a line of credit request sees that the business already depends on future revenue, and asks how quickly receivables are collected and whether the line would cover a real timing gap or a deeper shortfall.
A low ratio caused by slow-paying customers points to a line of credit or working capital. A low ratio caused by losses points to a business problem no funding type fixes.
Raising the Ratio Before a Request
- Collect overdue receivables, and invoice promptly when work is finished.
- Move slow stock, freeing cash.
- Put long-lived equipment purchases on equipment financing rather than paying cash or drawing a short-term line.
- Refinance short-term debt into a longer term, which moves part of it out of current liabilities.
Equipment financing and contractor business loans cover the funding side. The other guides and the Fort Pierce, FL page sit beside this worksheet.
By Hollygrove Lenders · Updated