Getting to Grips with Bookkeeping: The Current Ratio
Part of the Bookkeeping For Dummies Cheat Sheet (UK Edition)
The current ratio compares your current assets to your current liabilities, providing a quick glimpse of your business’s ability to pay its bills. The formula for calculating the current ratio is
Current assets – Current liabilities = Current ratio
The following is an example of a current ratio calculation:
£5,200 – £2,200 = 2.36 (current ratio)
Lenders usually look for current ratios of 1.2 to 2, so any bank would consider a current ratio of 2.36 a good sign. A current ratio under 1 is considered a danger sign because that indicates the business doesn’t have enough cash to pay its current bills. However, some business sectors have traditionally lower acceptable current ratio values, so find out about these before you leap to a judgement.