Acid-Test Ratio



Provided by the OREGON NETWORK OF BIZCENTERS

Visit One of the 20 Oregon BizCenters On-Line at WWW.BIZCENTER.ORG

The acid-test (quick) ratio measures the capability of your business, using liquid assets, to meet its short-term debts. The ratio will change constantly so it is important monitor the value of the ratio on a monthly basis.

Here is how to calculate the acid-test (quick) ratio for your business.

$
A.
Determine the value of all liquid assets from a current balance sheet.

Include cash, marketable securities, and all receivables.



$
B.
Look up current liabilities from a current balance sheet

$
C.
Calculate your acid-test ratio: Divide "A" by "B."

Express your answer in the format of $x.xx




D.
Look up an industry standard ratio from a source such as RMA (Robert Morris Associates).

E.
Is your ratio higher or lower than the industry standard?



If you are higher:



A probable favorable indicator of your ability to pay short-term debts.
Normally small business owners prefer ratio to be $1.00 or higher.
A very high ratio could indicate poor receivables or excess cash reserves.



If you are lower:



May experience problems paying short-term debts.
Consider liquidating some inventory to generate cash.
Investigate refinancing short-term debt with long-term debt.
Consider a sale/leaseback of fixed assets to generate cash.


Based on your analysis of your acid-test ratio, note three actions to take:

1.

2.

3. I'm gonna hire a CPA.


© QA , Inc., 2000

For Information Regarding BizTool Sponsorship,

Call 541-726-2250 or email leavittj@lanecc.edu