What it means
The idea behind quick assets is speed of conversion. Cash in the bank is already liquid, a short-term deposit or traded security can be sold within days, and a customer invoice due in 30 days will usually turn into cash on something close to schedule.
Inventory is deliberately left out. Selling stock in a hurry generally means discounting it, and in some businesses, such as a manufacturer holding half-finished goods, the stock cannot realistically be turned into cash at all before the bills fall due.
Prepaid expenses are also excluded for a simpler reason. Money already paid for next year's insurance or software licences will never come back as cash, so counting it as a resource for paying creditors would overstate liquidity.
Quick assets are mainly used to build the quick ratio, sometimes called the acid-test ratio, which divides quick assets by current liabilities. A ratio of 1.0 means the business could just cover its short-term obligations from fast-moving assets alone.
The nuance is that the receivables figure carries an assumption. If a large share of debtors is overdue or a major customer is in difficulty, the reported quick asset total is optimistic, which is why lenders often look at the ageing profile of receivables alongside the ratio.
In practice
Real-world examples.
Example
A wholesale distributor with $4,000,000 of inventory and $600,000 of quick assets looks comfortable on a current ratio basis but has a quick ratio of only 0.6. Its bank sets a covenant on the quick ratio rather than the current ratio, because stock is the least reliable part of the balance sheet.
Example
A consultancy holds almost no inventory, so its quick assets and current assets are nearly identical. The finance director reports the quick ratio anyway, since the business is unusually exposed to a handful of large client invoices.
Example
A car dealership carries most of its value in vehicles on the forecourt. During a downturn it discovers that its quick assets cover barely a third of its short-term liabilities, which drives a decision to hold fewer demonstrator models.
Formula
Calculation
Quick Assets = Cash and Cash Equivalents + Short-Term Investments + Accounts Receivable
Quick Ratio = Quick Assets / Current Liabilities
A commercial catering supplier reports the following at its quarter end: cash of $240,000, short-term investments of $160,000, accounts receivable of $400,000, inventory of $350,000 and prepaid expenses of $50,000. Current liabilities are $500,000.
Quick Assets = $240,000 + $160,000 + $400,000 = $800,000
Quick Ratio = $800,000 / $500,000 = 1.6
Total current assets are $800,000 + $350,000 + $50,000 = $1,200,000, giving a current ratio of $1,200,000 / $500,000 = 2.4. The gap between 2.4 and 1.6 shows how much of the company's apparent short-term strength is tied up in stock, which is exactly the point of measuring quick assets separately.Case study
Seen in the real world.
Larkfield Ceramics is a fictional homeware manufacturer used here as an illustrative example. On paper the business looked comfortable, with current assets of $3,200,000 against current liabilities of $1,600,000 and a current ratio of 2.0.
When a supplier asked for tighter payment terms, the finance manager recalculated on a quick asset basis. Inventory of $1,900,000 and prepayments of $100,000 came out, leaving quick assets of $1,200,000 and a quick ratio of $1,200,000 / $1,600,000 = 0.75. Worse, roughly $300,000 of receivables were more than 90 days overdue, so the realistic figure was closer to $900,000 and a ratio of about 0.56.
In this illustrative outcome Larkfield reduced finished-goods stock over two quarters and put a credit controller on the overdue accounts. The current ratio barely moved, but quick assets rose to $1,850,000 and the supplier withdrew its request for prepayment, which is a reminder that the quick measure is the one creditors tend to trust.
Watch out
Common mistakes.
- Including inventory in quick assets. Stock is the single item the measure is designed to exclude, and adding it back simply recreates the current ratio.
- Taking the receivables balance at face value. Overdue or disputed invoices should be discounted before the figure is treated as near-cash.
- Treating a quick ratio below 1.0 as automatic distress. Businesses that collect cash at the point of sale and pay suppliers on credit, such as supermarkets, routinely operate below 1.0 without difficulty.
Questions
People also ask.
Are quick assets the same as liquid assets?
They are closely related, but liquid assets is a looser term that can include anything readily saleable, while quick assets has the specific definition of current assets excluding inventory and prepayments.
Should an undrawn overdraft count as a quick asset?
No, because it is available borrowing rather than an asset the company owns, though it is worth disclosing alongside the ratio as a source of liquidity.
How often should quick assets be reviewed?
Monthly for most businesses, since receivables and cash move constantly, and any business with a lending covenant tied to the quick ratio should track it as part of its regular management accounts.
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