Current Ratio Calculator

The good news is that the calculation is fairly simple. The main work is ensuring you find and collect all the correct pieces of information needed to complete the formula. There are four steps to calculate the current ratio. They are

1. Gather financial statements, mainly the balance sheet or annual report. 
2. Determine the current assets as listed on the balance sheet. The balance sheet may already total the assets, or you may need to compile a list of assets and total it yourself. 
3. Determine the current liabilities as listed on the balance sheet
4. Enter these figures into the formula and compute.

Let’s calculate this financial ratio together.

The Outpost, a treehouse builder, has $38,400 in cash, $7,200 in treasury bonds, no marketable securities, $25,100 in accounts receivable, and $4,300 in prepaid expenses.  That brings the company’s current assets to $75,000.

$75,000 total current assets = $38,400 cash + $7,200 cash equivalent + $25,100 accounts receivable + $4,300 prepaid liabilities

The company’s current liabilities include $5,640 in accounts payable, $28,700 due in bank loans, and $2,200 on credit cards. That brings their total liabilities to $36,540.

$36,540 total current liabilities = $5,640 accounts payable + $28,700 bank loans + $2,200 credit card balances

Now that we have our main inputs, we can plug them into the formula and calculate.

2.05 = $75,000 total assets / $36,540 total liabilities 

The Outpost has a good ratio of 2.05, which means the company has room to take on additional liability to invest in business growth.

Every industry will have its own definition of a good current ratio, but generally, you want it above one. That means a company’s debt equals or is less than its assets. Look at your industry average and aim for a current ratio at or slightly above it. A current ratio that’s too low indicates a company that’s not making use of its current assets. While a high current ratio means a company has an elevated risk of default. 

As a quick note, in industries with faster inventory turnover or shorter payment cycles, current ratios can be below one and still be considered healthy. 

Sometimes, the current ratio falls below one, which is generally considered low. This can be due to several reasons, but most commonly, it’s the cause of one or more of the following.

• Low inventory volume and cash flow
• Overhead expenses higher than budgeted
• Unfavorable payment terms or cycles
• Carrying too many short-term liabilities
• Rate hikes for loans with adjustable interest rates

A company with a low current ratio is at risk of insolvency. This is why it’s important to track the current ratio (and other financial metrics) and be prepared to adjust your business strategy when metrics fall. Some common ways to improve your current ratio include

• Reduce overhead expenses
• Re-amortizing current loans (i.e., loan recasting)
• Negotiate longer payment cycles for accounts payable
• Negotiate shorter payment cycles for accounts receivable
• Delay any capital purchases that would decrease your cash balance
• Delay taking on any additional debt or liabilities
• Lower any personal draw on the business
• Sell capital and short-term assets that generate low or no return and use the cash to pay off short-term obligations

Anything that creates more assets or reduces liabilities will positively affect your current ratio. The key is to do so in a way that makes future profit-making easier (or at least doesn’t make it harder). For example, don’t sell a long-term asset significantly contributing to production.

There are three strategies to increase the quick ratio of your business. 

1. Increase sales and inventory turnover: Sell your inventory faster with the help of discounts, increased marketing, and staff sales training. 
2. Pay down short-term obligations faster: Make larger payments toward the principal or sell an illiquid asset (equipment, real estate) to pay off debt.
3. Reduce invoice collection period: Look for ways to get money faster, such as incentivizing faster payment (e.g., discount for paying early). 

But remember that any strategy that makes sense for your business and either increases liquid assets or decreases liabilities will benefit your quick ratio.

Both ratios are useful for small business accounting but provide different (but related) insights into a businesses financial health. The current ratio accounts for a company’s inventory, which is generally considered an illiquid asset. The quick ratio, sometimes called the acid-test ratio, leaves out the inventory because it can’t be converted into cash (generally) in less than 90 days. Inventories must be sold piecemeal, so it can take up to one year to fully liquidate stock. In this way, the current ratio represents a more exact representation of the company’s full liquidity, whereas the quick ratio accounts for short-term liquidity.