Sometimes it's necessary to look at the "what-if" factors in a situation. While we don't recommend indulging in this thought process while boarding an airplane, it's a good idea to consider some scenarios when it comes to your business.
For example: "What if..." you don't sell all your inventory? "What if..." your inventory is over-inflated? "What if..." it came time to pay your short-term expenses in the midst of all this? Would you be too low on cash to be able to pay?
Looking at Quick Ratio forces you to look at whether you can cover your obligations and what might need to be adjusted if you can't.
- KFI: Quick Ratio
- DEFINITION: The Quick Ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
- FORMULA: (Current Assets - Inventory) / Current Liabilities
- SIGNIFICANCE: Compared to the current ratio, the quick ratio lets you know if you currently have enough cash to cover your short term expenses after excluding inventory.
- RECOMMENDATION: If you find your Quick Ratio is too low, but your Current Ratio is in line with your peers, consider ways to connect inventory to cash and carry less inventory going forward.
- RELATED: Net Working Capital Ratio
As companies are generating more data than ever before, proper insights are becoming more and more important to the success of businesses. However, many companies are under the false impression that proper insights are too expensive or far too time consuming- two things that simply aren't true. To help companies better understand how Peerview Data’s process of Big Data, analytics and benchmarking software process works, we're continuing a series of blog posts that examine the individual performance metrics that are at the heart of this analysis.