What is Current ratio (quick ratio and acid-test ratio)?

Want to know if you can pay your company’s bills next month? The current ratio gives you that answer. Think of it as a simple check: can you cover upcoming bills with the assets you have right now?

This guide explains the current ratio, identifying formula components and potential pitfalls to help you calculate it accurately. You'll also learn to track this metric in Runway, helping model owners and scrappy finance teams get out of spreadsheets and back to planning.

Understanding the current ratio

The current ratio measures whether your assets can cover your short-term liabilities. Investors and lenders look at this first. They want to know if you’re liquid enough to handle what’s coming up.

Here is the simple formula:

Current Ratio = Current Assets / Current Liabilities

Imagine you have $200,000 in current assets and $100,000 in short-term liabilities. Your current ratio is 2.0. You possess two dollars in assets for every dollar you owe.

This metric anchors your financial ratios and business analysis. It provides clarity on your daily operating comfort. It confirms you are ready for unexpected expenses or late revenue.

The current ratio acts as an early warning system rather than a compliance checkbox. A low number signals a need for quick decisions. A high number suggests you have cash sitting idle that could work harder for your growth.

Why liquidity metrics matter for finance teams

Liquidity metrics, like the current ratio, drive daily decisions. They show you how to manage working capital, plan smart growth, and keep stakeholders informed.

Your cash runway depends on strong liquidity. If your current ratio slides, you risk scrambling to pay vendors or payroll, even if your profit and loss report looks good. Revenue on paper won’t pay bills. Cash will.

Investors want to see your liquidity during due diligence. They want confidence you can cover commitments without always fundraising. Investors review your balance sheet for liquidity, leverage, and cash runway. They ask: “Can you cover your short-term obligations? Are you carrying too much debt?”

Debt covenants often set minimum liquidity thresholds. If you fall below, you could trigger a default or lose credit access. Staying above those numbers with your current ratio keeps you in control.

Finance teams use liquidity metrics to guide short-term moves. Draw on your line of credit? Stretch payables? Speed up collections? Your current ratio gives you context for these choices.

Key methods for calculating liquidity ratios

Liquidity ratios give you different views of the same financial picture. The classic current ratio provides the broadest look. Other formulas filter out less liquid assets so you can focus on what is instantly accessible.

Each ratio adds a new layer of insight. Use them together to get a complete view of your cash position.

Standard current ratio formula

Here’s the simplest calculation:

Current Ratio = Current Assets / Current Liabilities

Current assets include cash, accounts receivable, inventory, prepaid expenses, and marketable securities.
Current liabilities include accounts payable, short-term debt, accrued expenses, deferred revenue, and the payable portion of long-term loans due within the next year.

This inclusive ratio assumes all current assets help cover obligations. Since that is not always the case, other ratios provide necessary context.

Quick (acid-test) ratio

The quick ratio removes inventory and prepaid expenses:

Quick Ratio = (Current Assets - Inventory - Prepaid Expenses) / Current Liabilities

This formula asks hard questions about what happens if inventory does not sell quickly or prepaid expenses fail to help meet bills. It focuses on exactly what you can turn into cash immediately.

SaaS companies usually have minimal inventory so quick and current ratios tend to look similar.
Manufacturing and retail businesses need to separate slow-moving inventory to get an accurate view.

When inventory makes up a large portion of your assets, the quick ratio offers a sharper and more honest look at liquidity.

Cash ratio

The cash ratio removes everything except cash and equivalents.

Cash Ratio = (Cash + Cash Equivalents) / Current Liabilities

This strict calculation determines if you can pay everyone right now using only cash on hand. Most companies keep their cash ratio below 1.0 because a higher number implies you are sitting on a pile of idle capital. However, tracking this metric helps you understand your immediate financial buffer.

Operating cash flow ratio

This ratio uses cash from actual operations, not just balance sheet totals:

Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities

Use this to see if your day-to-day work brings in enough cash for near-term bills. A result above 1.0 means operations fund your short-term obligations. A result below 1.0 indicates you rely on financing or asset sales.

Scrappy finance teams find this especially useful for companies with stable cash flows. If you manage a fast-growing team currently burning cash, focus on other liquidity ratios first.

Breaking down current assets and liabilities

Start by knowing what counts in each group.

cash and cash equivalents: bank balances, investments you can access right away
accounts receivable: money customers owe you, due within a year
inventory: products to sell in the next 12 months
prepaid expenses: costs paid upfront, such as insurance or rent
marketable securities: investments you can sell quickly, at little loss
accounts payable: what you owe vendors and suppliers
short-term debt: loans and credit due in 12 months
accrued expenses: costs pending payment, like wages or taxes
deferred revenue: money collected for services not yet delivered
current portion of long-term debt: payments due this year on bigger loans

A few important notes:

restricted cash: if you can’t use it to pay bills, don’t count it. For example, cash required by your bank as part of a loan agreement shouldn’t be included.
line of credit availability: this isn’t a current asset on the balance sheet, but extra access affects real liquidity. Some adjust the ratio to reflect available credit.
inventory quality matters: not all inventory sells quickly. Outdated stock inflates current assets without adding liquidity.
receivables collectibility: slow-paying customers or overdue invoices reduce the actual value you can unlock. Track your aging receipts and mark down doubtful accounts.

For teams with lumpy revenue, current ratio swings month to month. Deferred revenue models, like in SaaS, show a liability for cash already collected, making the ratio appear weaker than your cash position.

Working capital, cash runway, and other influential metrics

The current ratio connects to your wider financial world, but it acts as just one piece of the puzzle. Start with working capital. This metric takes your current assets minus liabilities to show your cash cushion in actual dollars. The current ratio transforms that cushion into a percentage to give you a clearer angle on liquidity. This ties directly to cash runway. Runway tells you exactly how long you can keep operating with the cash on hand. A shrinking current ratio shortens your runway even if you maintain a strong bank balance.

Operational timing drives these numbers. You improve liquidity when you optimize the components behind the math:

Accounts receivable turnover: Collection speed matters. Slow collections inflate assets without freeing up actual cash.
Accounts payable timing: You free up short-term cash by stretching payments, though it might lower your current ratio.
Inventory management: Extra stock ties up cash and boosts the ratio, but it doesn't add real liquidity.

Your short-term financing choices rely on knowing your liquidity status. You can likely skip credit lines with a strong current ratio, or you can secure credit before you need it if things look tight. Context dictates your targets. SaaS teams with heavy deferred revenue look different from manufacturers or retailers with bigger inventories. Service companies often run tighter ratios because their assets are more liquid. Compare your ratio with peers in your industry to get the full picture. Lenders and investors balance their expectations based on your specific business model and stage.

Common pitfalls and how to avoid them

All current assets aren’t equally liquid. Cash and receivables are more available than inventory or prepaid expenses. Run the quick ratio alongside the current ratio to see the difference.
Receivables quality matters. Some invoices won’t get paid. Aging or overdue receipts inflate assets, so always check your aging report.
Inventory overstatements. Outdated or slow-moving stock doesn’t add liquidity. Track turnover and write down what’s obsolete.
Deferred revenue confuses many. It’s a liability but represents cash you’ve collected. High deferred revenue could make you look less liquid on paper, so keep context in mind.
Don’t compare across industries. A 1.5 current ratio in SaaS means something different in manufacturing. Compare with industry peers.
Beware the ratio in isolation. A 2.0 ratio on $20,000 assets versus $10,000 liabilities still means a tight situation. Look at hard numbers and trends rather than just ratios.
Track seasonality. Assets and liabilities swing across the year. Your current ratio at one point doesn’t tell the whole story, so follow the trend line.
Watch for one-time spikes. Big prepayments or purchases can distort ratios. Adjust your analysis to spot the underlying pattern.
Scan for off-balance-sheet liabilities. Some commitments don’t show up but can affect real liquidity. Track these and factor them in.
Know the difference between current and quick ratios. The current ratio counts all assets while the quick ratio drops inventory and prepaid expenses. Each tells a different story.

One number means little on its own. Track movements over time, study patterns, and look for stories in the numbers.

How to calculate the current ratio in Runway

In Runway, you can automate this calculation so it updates every time your actuals roll in. Here is how you build it.

1. Bring your balance sheet into a Runway database

Start by connecting your general ledger. Whether you use QuickBooks Online, Xero, or NetSuite, or others, utilize the provided balance sheet templates. This creates a database like BS Data with a numeric driver segmented by account fields like Account Name and Account Type.

Make sure you configure this as a standard database with a data source, driver, and segments.

2. Map your accounts to liquidity categories

You need to tell Runway which accounts are liquid. Create a new database called BS Liquidity Mapping. Configure it to be data-source powered by your granular balance sheet database. Segment it by your account dimension so every account appears once as a row.

Add a new Dimension column called Liquidity Category to this mapping database. Go through the rows and assign one of these values to each account:

Quick Asset (cash, equivalents, A/R)
Other Current Asset (inventory, prepaids)
Non-current Asset
Current Liability
Non-current Liability
Equity

You can manage these tags as described in Dimensions basics. This table now acts as your lookup key for liquidity.

3. Pull liquidity categories back into your balance sheet

Go back to your main BS Data database. Add a new column and choose Lookup. Configure it to pull values from the Liquidity Category column in your mapping database, matching them based on Account Name.

Each row in your balance sheet now knows its liquidity status. You have a driver segmented by account and tagged with a category, which allows for easy filtering.

4. Create a rolled-up database (optional)

For a cleaner setup, you can build a separate database called BS by Liquidity. Set the data source to your granular BS Data and the driver to your balance sheet amount. Change the segmentation so it only groups by Liquidity Category, dropping the individual account names. This gives you a streamlined time series for each liquidity bucket.

5. Set up your helper drivers

Create a new Model or a Drivers table block to house your calculations. Add three new Number drivers: Current Assets, Current Liabilities, and Quick Assets.

Use the calculations below to set the forecast formula for each one. These formulas use the sum() function with filters, as detailed in Functions & operators.

Current Assets: Use sum(BS by Liquidity.BS Amount) and add a filter where Liquidity Category is Quick Asset OR **Other Current Asset**. This tracks your total current assets.
Current Liabilities: Use sum(BS by Liquidity.BS Amount) and filter where Liquidity Category is Current Liability.
Quick Assets: Use sum(BS by Liquidity.BS Amount) and filter where Liquidity Category is Quick Asset. This is used for the acid-test ratio.

6. Define your current and quick ratios

In the same model, add two more Number drivers: Current Ratio and Quick Ratio (Acid-test). Since you already built the components, the formulas are simple arithmetic.

Current Ratio: Enter Current Assets / Current Liabilities. This measures your overall ability to pay short-term obligations.
Quick Ratio (Acid-test): Enter Quick Assets / Current Liabilities. This tests your ability to cover debts using only your most liquid assets.

These drivers are now live timeseries. You can view your liquidity health across any time period by adjusting the table's rollup settings.

The big value? You’re not just tracking ratios. You use them to lead decisions. Runway ties ratios to your planning so you see results before you act. That’s forecasting better, not just firefighting.

Frequently asked questions

Does a strong current ratio guarantee financial health?

No. A high ratio suggests you have enough assets to cover debts, but it doesn't account for timing. If your assets are tied up in slow-paying invoices or unsold inventory, you can’t use them to pay immediate bills. You need cash flow, not just liquid assets on paper.

How often should we calculate the current ratio?

Standard practice involves checking this monthly during your close process. However, checking it weekly helps you catch cash flow dips early. Using a platform like Runway allows you to automate these checks, so you can monitor real-time changes without rebuilding your spreadsheet models constantly.

Can we improve our current ratio without raising more cash?

Yes. You can negotiate longer payment terms with suppliers to reduce current liabilities. You can also focus on collecting receivables faster. Another option involves refinancing short-term debt into long-term debt, which removes it from the current liabilities calculation.

Why do current ratio benchmarks vary by industry?

Business models dictate liquidity needs. A retailer needs inventory to make sales, so they often carry higher current assets. A service agency or SaaS company might operate with very low current assets because they don't hold inventory. Compare your numbers against similar companies rather than general averages.

Make your current ratio actionable

Your current ratio answers the short-term question about paying bills. But the real insight comes when you track it regularly. Match it against benchmarks and tie it to decisions on spending, hiring, or growth.

Don't treat the ratio like a pass or fail test. Use it like a traffic light. If the number falls under 1.2, you can act before payments bottleneck. If it rises above 2.0, consider putting that excess capital to work. The goal is to understand your liquidity and move forward with confidence.

Runway makes this process automatic for model owners and finance teams who need better visibility. We give you live ratios, scenario modeling, and clear benchmark comparisons. You get the tools for cross-team planning without the usual spreadsheet headaches.

Ready to track your current ratio alongside your full financial stack? Get started with Runway and see how real-time reporting helps you take action.

What is the current ratio (quick ratio and acid-test ratio)?