Quick ratio 1.36—can Veletrgovina add stock for spring builds?
Model September peak from last year. If planned inventory stays near EUR 90,000 or turns faster, yes. If stock doubles, rerun quick ratio before PO approval.
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Quick Ratio
Quick Ratio: plain-English definition, formula, worked example, how to interpret the result, peer-based benchmark guidance, common mistakes, and management actions in the ZBI Business Control Library.
What is Quick Ratio?
Quick ratio—often called the acid test—asks whether you could meet near-term obligations without selling inventory. It is (current assets minus inventory) divided by current liabilities. At Veletrgovina Split, a EUR 7M building-materials wholesaler, EUR 280,000 current assets minus EUR 90,000 inventory over EUR 140,000 liabilities is 1.36. I watch quick ratio more closely than current ratio when stock is bulky and seasonal because lenders and suppliers know inventory is the last asset you monetise without a fire sale.
Why Quick Ratio matters
When inventory grows ahead of a construction season, current ratio can look comfortable while quick ratio tightens—treasury sees it first in overdraft touches. A quick ratio below 1.0 is not automatic panic for a fast-turn wholesaler, but it demands weekly cash modelling. Above 1.3 with poor receivable quality is false comfort. Suppliers tightening credit check quick ratio and payment history more than your sales story. Ignore it and you fund stock with emergency factoring at a fee that never appears in the inventory line.
Formula and variables
Quick Ratio = (Current Assets − Inventory) / Current Liabilities
Current assets — same base as current ratio before subtracting inventory.
Inventory — balance-sheet inventory at period end; exclude if your lender uses a stricter definition.
Current liabilities — payables, short-term debt, and near-term accruals.
Excel: =IFERROR((B2-B3)/B4,0) — B2 assets, B3 inventory, B4 liabilities.
Real business example
Veletrgovina Split, a EUR 7M building-materials wholesaler, closes September: current assets EUR 280,000; inventory EUR 90,000; current liabilities EUR 140,000. Quick ratio = (280,000 − 90,000) / 140,000 = 190,000 / 140,000 = 1.36. Current ratio the same month is 2.0—inventory is only one-third of assets, so quick and current tell a consistent story. Last September quick ratio was 1.18 when inventory was EUR 130,000; the warehouse manager and CFO agreed the EUR 40,000 stock reduction before peak season improved liquidity without stockouts on A-class cement and insulation SKUs.
How to interpret the result
Quick ratio stress-tests liquidity without relying on inventory liquidation.
- Compare to bank covenant definitions—some lenders exclude prepaids or related-party receivables.
- Track weekly in tight cash periods; monthly is enough when facilities have headroom.
- Pair with DSO and inventory days—ratio moves often trace to one working-capital leg.
- Factoring receivables improves quick ratio but raises financing cost—disclose in board notes.
Benchmark context
Building-materials wholesalers often run quick ratio between 0.9 and 1.5 depending on season and supplier terms. Benchmark against covenant and your own September peak from prior years. Sustained quick ratio below 1.0 with slow AR usually precedes supplier term cuts within two quarters.
Red flags
- Quick ratio below 1.0 for eight weeks while current ratio above 1.8—inventory trap.
- Quick ratio improved only because payables stretched 15+ days—supplier risk rising.
- Strong quick ratio but overdraft at limit—cash not in operating accounts or large tax payment imminent.
- Receivables over 90 days grew 30% while quick ratio flat—numerator quality falling.
- Covenant uses stricter quick definition than internal pack—breach surprise at audit.
Common mistakes
- Using current ratio alone when inventory exceeds 40% of current assets.
- Assuming all cash is available—restricted deposits and escrow do not pay suppliers.
- Treating factoring as permanent liquidity without showing the cost in margin.
- Excluding inventory but leaving slow prepaids in the numerator.
- Ignoring VAT and payroll accruals due within two weeks.
What should management do next?
- Report quick and current ratio together with cash, undrawn facility, and thirteen-week cash flow.
- Set inventory caps by season tied to quick ratio forecast before buy season.
- Accelerate collections on accounts over 60 days before increasing stock.
- Confirm lender quick-ratio definition annually and mirror it internally.
- Model quick ratio impact of any new short-term debt before signing.
Related calculators
Related analyzers
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FAQ
Below 1.0—do we stop paying suppliers on time?
Not automatically. Weekly cash model first. Fast-turn SKUs and strong customer deposits can support sub-1.0 briefly; slow AR cannot.
Does factoring permanently fix quick ratio?
It converts receivables to cash minus fee. Ratio improves but financing cost rises—show factoring separately in the board pack.
Which assets do banks exclude beyond inventory?
Often prepaids, deferred tax, and related-party receivables. Ask your relationship manager and match internal reporting.
Quick ratio strong but treasury stressed—how?
Large VAT or payroll accrual due before receivables collect, or cash in restricted accounts. Run thirteen-week cash, not ratio alone.
Summary
Quick ratio tests near-term liquidity without counting inventory. Use it with cash flow and covenant definitions—especially when stock is seasonal or bulky.
Reviewed by ZBI Business Control Library · Last updated 2026-06-15