Some business owners confine their working knowledge of finances to what’s in the bank today vs. what needs to be paid today. Others will give a quick glance at monthly financial statements their bookkeepers have given them. But the savviest business owners take those financial statements and examine some simple financial ratios in order to keep tabs on and improve their small businesses. These ratios should be compared to industry standards. (Don’t worry, there won’t be a test at the end!)

Quick Ratio

Also known as the acid test, the quick ratio is a way to understand how much money you have to deal with your current liabilities. It’s calculated by taking your current assets (excluding inventory, which is not quickly convertible to cash) and dividing it by your current liabilities. 

A ratio of 1.0 is acceptable, but it means that you have only $1 of cash on hand to deal with each $1 of liabilities. Anything north of 1.0 means that you have at least a bit of cushion in case of a cash crunch. Click here to read more…