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The working capital ratio sometimes referred to as the current ratio, compares a business’s current assets against current liabilities.

Working Capital Ratio = Current Assets / Current Liabilities

A working capital ratio between 1.5 and 2 is ideal for many small businesses. 

The quick ratio is a compares a business’s more liquid assetsLinks to an external site. (those can be turned into cash wquickly) against its current liabilities.

Quick Ratio = (Cash + Cash Equivalents + Marketable Securities + Accounts Receivable) / Current Liabilities

Here’s how the quick ratio would be calculated for a hypothetical business with the following on its balance sheet:

• Cash + Cash Equivalents: $20,000
• Marketable Securities: $10,000
• Accounts Receivable: $10,000
• Inventory: $10,000
• Current Liabilities: $$40,000

Quick Ratio is ($20,000 + $10,000 + $10,000) / $40,000 = 1.00

You may have noticed that inventory is excluded from the quick ratio calculation. That’s because inventory typically cannot be reliably liquidated in a short period at fair market value – so, it is not a very liquid asset.

A good quick ratio is dependent on your industry and the specifics of your small business. That said, a ratio of one or a little higher is usually good, as you wouldn’t have to rely on inventory to cover current liabilities.

The cash ratio looks at cash and cash equivalents vs. current liabilities. 

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

So, a business with $30,000 in cash and cash equivalents and $40,000 in current liabilities would have a cash ratio of 0.75 ($30,000/$40,000).

The cash ratio is a very strict liquidity measurement, making it a useful “stress test” for your small business. In the event of a recession, you might not get paid on time by customers and need cash to satisfy your short-term financial obligations.

And in any economic environment, having a solid cash position reduces your reliance on other, less liquid assets to pay your bills.

The right cash ratio for your small business depends on your business model, industry, and economic outlook. If you expect a recession in the next six months, for example, you may want a cash ratio on the higher side.