If you’re like most business owners, you probably want to know how to improve quick ratio. After all, a strong quick ratio is essential for maintaining financial health and stability.
Fortunately, there are a few key steps you can take to improve your quick ratio. In this blog post, we’ll show you how to improve quick ratio the right way.
How to Improve Quick Ratio
There are a few ways to improve a company’s quick ratio. One way is to increase the level of current assets.
This can be done by either increasing inventory levels or by investing in more liquid assets such as cash or marketable securities.
Another way to improve the quick ratio is to decrease levels of current liabilities. This can be accomplished by paying off outstanding debts or by negotiating longer terms with suppliers.
How to Analyze Quick Ratio?
The proportion of the amount of cash, liquid investments, marketable securities, and account receivables to the number of liabilities is known as a quick ratio.
Current liabilities include all liabilities other than bank overdraft and cash credit. It gauges the monetary strength of a company by assessing its capability to pay its debts by utilizing its short-term resources.
This article provides tips on how to interpret and improve your quick ratio or acid test ratio.
Understanding Quick Ratio or Acid Test Ratio
The acid test ratio is a more evolved version of the current ratio, which is a popular measure of a company’s short-term solvency.
Although both ratios measure a company’s ability to meet its short-term obligations, the acid-test ratio is a more comprehensive measure of liquidity.
The acid test ratio is a formula that measures the ratio of current liabilities to the most easily liquidated assets. This does not include the stock of the company, which is excluded because a stock cannot be converted to cash. This can give a good indication of how likely the company is to be able to meet its short-term financial obligations.
A few analysts include inventory in the numerator of the quick assets to total asset ratios because of its high liquidness compared to other accounts receivable.
How to Interpret Quick Ratio / Acid Test Ratio
The quick ratio is a measure of a firm’s ability to meet its short-term obligations. It compares the company’s current liquid assets and its current liabilities.
It’s used to verify if a business has the financial capacity to pay off its short-term debts.
A company with a quick or an acid test 1:1 ratio is in a strong position to pay all its bills. This indicates the company’s good financial health.
A higher quick ratio is better because it implies the company has enough cash available to pay its bills.
While a 4:1 ratio indicates that a company has four times more available cash than required, it could also mean that the company is not managing its finances well.
If a business has idle assets, it is not efficiently using its resources to generate profits. This could be a sign of poor financial management.
It is wise to compare a company’s quick ratio to industry standards. Doing so will help you determine if it is performing well or not.
How to Improve Quick Ratio
The quick ratio is valuable to lenders, bankers, investors, and anyone else who needs a quick way to determine a company’s liquidity.
A business needs to maintain strong relationships with all of its stakeholders, who view the quick ratio as an indicator of the company’s liquidity. In turn, this affects the level of support that these stakeholders are willing to provide. Therefore, businesses need to keep their quick ratio under control.
Keeping this ratio managed and under control is very important.
Improving your accounts receivable and paying your current bills are two of the quickest ways to improve your quick ratio.
As the quick ratio is similar to the current ratio but excludes inventory, it can be increased by actions that increase the Current Ratio.
You can improve your quick ratio by doing the following:
1. Improve Inventory Turnover Ratio
By converting your quicker-to-sell items into cash and receivables, your working capital would increase, improving your current ratio.
2. Eliminate Idle Assets
Selling any unprofitable or useless company assets and having a larger amount of cash would improve the numerator of the quick ratio.
3. Improve Collection Period or ARs
A shorter collections cycle will directly influence the cash conversion cycle of a business. A quicker conversion of receivables to cash in a company means that more of its revenue can be put towards paying down debt.
The terms for payment have to be made clear from the start to shorten the amount of time it takes for your customer to pay you.
4. Pay Off Current Liabilities
Improving your quick ratio involves paying your suppliers, vendors, and lenders more quickly. This is accomplished by either making smaller payments or by paying them sooner than the due date.
5. Keep Drawings at a Minimum
Drawing funds from your business for personal use should be limited as much as possible. An increase in drawing from business accounts means less money for working capital.
This would increase the owner’s equity and decrease the quick ratio.
Having profit reinvested back into your business is ideal, and that usually means having enough working capital. The higher your drawing, the lower your working capital will be.
6. Move Idle Cash to Sweep Accounts
With sweep bank accounts, you can earn interest on any money that is sitting in your account. This money can be swept into an interest-bearing account and brought back later.
By keeping cash at hand, the management team can keep the quick ratio higher while still not missing out on any investment opportunities.
How to improve quick ratio? Here are five more ways to do it:
- Improve Your Accounts Receivable Turnover Ratio
- Decrease the Average Collection Period for Accounts Receivable
- Increase Sales on Credit
- Reduce Inventory Levels
- Obtain Financing to Support Operations