The quick ratio (or acid test) measures your ability to pay short-term obligations using only your most liquid assets, excluding inventory. It is calculated as (Current Assets - Inventory) / Current Liabilities.
The quick ratio is a more conservative measure of liquidity than the current ratio. While the current ratio includes all current assets (including inventory, which may take time to sell), the quick ratio only includes assets that can be quickly converted to cash: cash, marketable securities and accounts receivable. The formula is: (Current Assets minus Inventory) divided by Current Liabilities. A quick ratio of 1.0 or above indicates you can cover all short-term obligations with liquid assets alone. This ratio is particularly important for businesses that hold significant inventory, as inventory can be slow to convert to cash, especially in downturns. For service businesses with little or no inventory, the quick ratio will be very similar to the current ratio. Banks and lenders often look at the quick ratio when assessing creditworthiness. SortBooks provides real-time quick ratio calculations alongside other liquidity metrics, giving you and your lenders confidence in your short-term financial health.
SortBooks helps with the bookkeeping behind quick ratio by connecting to your Xero account and using AI to suggest the right account for transactions sitting in catch-all accounts, learning from your own past coding. Instead of fixing quick ratio by hand, you review each suggestion, approve it, and SortBooks updates Xero, GST code included. Then ask the AI CFO about your numbers, using live Xero data.
The current ratio measures your ability to pay short-term obligations by dividing current assets by current liabilities. A ratio above 1.0 indicates you can cover your short-term debts.
Current assets are resources your business expects to convert to cash, sell or consume within 12 months. They include cash, accounts receivable, inventory and prepaid expenses.
Current liabilities are debts and obligations your business must pay within 12 months. They include accounts payable, short-term loans, accrued expenses and tax payable.
Liquidity measures how quickly and easily your business can convert assets to cash to meet short-term obligations. High liquidity means you can pay bills without difficulty.
Working capital is the difference between current assets and current liabilities. It measures the short-term financial health and operational efficiency of your business.
Connect Xero, check the AI's suggestions and approve the changes. SortBooks updates Xero for you.