The quick ratio, also known as the acid-test ratio, measures a company's ability to meet short-term liabilities using only its most liquid assets — cash, marketable securities, and accounts receivable. By excluding inventory and prepayments, it provides a more conservative liquidity assessment than the current ratio.
Formula
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current LiabilitiesIn Depth
The quick ratio is a stricter liquidity test than the current ratio because it only counts assets that can be rapidly converted to cash. Inventory is excluded because it may take weeks or months to sell, and its realisation value may differ from book value. Prepayments are excluded because they represent future benefits, not available cash.
The formula is: Quick Ratio = (Cash + Short-term Investments + Accounts Receivable) / Current Liabilities. A ratio of 1.0 or above indicates the company can cover its current liabilities without relying on inventory sales.
For FP&A teams, the gap between the current ratio and the quick ratio reveals how dependent the business is on inventory for its liquidity position. A company with a current ratio of 2.0 but a quick ratio of 0.7 is heavily inventory-dependent — if demand slows or inventory becomes obsolete, the liquidity position deteriorates rapidly.
The quick ratio is particularly relevant for businesses with slow-moving or perishable inventory, seasonal businesses building stock ahead of peak periods, and companies in industries prone to inventory obsolescence (technology, fashion).
For UK businesses, the quick ratio should be monitored in conjunction with cash flow forecasts to ensure that upcoming obligations — including quarterly VAT payments, PAYE/NI remittances, and annual corporation tax — can be met from liquid assets without emergency measures.
Real-World Example
A UK fashion retailer has current assets of £5M (£600K cash, £800K receivables, £3.2M inventory, £400K prepayments) and £3M current liabilities. The current ratio is a comfortable 1.67, but the quick ratio is only 0.47 — well below 1.0. With a seasonal peak approaching and £1.2M in supplier payments due, the FP&A team arranges a £500K short-term credit facility as a precaution.
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