Current Ratio Formula

Current Ratio = Current Assets ÷ Current Liabilities

Current Assets Include: Cash and cash equivalents, accounts receivable, inventory, prepaid expenses, short-term investments.

Current Liabilities Include: Accounts payable, short-term debt, accrued expenses, current portion of long-term debt, taxes payable.

A retail store with Total Current Assets of $80,000 (Cash $25,000, AR $15,000, Inventory $40,000) and Total Current Liabilities of $40,000 (AP $20,000, short-term loan $15,000, accrued expenses $5,000) has a Current Ratio of 2.0 — healthy, the business can easily cover short-term obligations.

• 2.0+ (Excellent): Strong liquidity. You have twice the assets needed to cover liabilities. May indicate excess cash that could be invested in growth.
• 1.5–2.0 (Good): Healthy liquidity. Comfortable cushion to cover short-term obligations and handle unexpected expenses.
• 1.0–1.5 (Fair): Adequate but tight. You can cover obligations but have little margin for error. Monitor closely.
• Below 1.0 (Risky): Insufficient current assets to cover liabilities. High risk of cash flow problems. Consider financing to improve liquidity.

Current Ratio: Includes all current assets including inventory. Less conservative. Best for businesses with liquid inventory.

Quick Ratio: Excludes inventory, using only the most liquid assets. More conservative. Best for businesses with slow-moving inventory.

1. Increase Current Assets: Build cash reserves, speed up receivables collection, or optimize inventory levels.
2. Reduce Current Liabilities: Pay down short-term debt, negotiate longer payment terms with vendors, or convert short-term debt to long-term debt.
3. Use Working Capital Financing: A working capital loan or business line of credit can boost current assets and improve the ratio.