What is the current ratio?
The current ratio is current assets divided by current liabilities, and shows whether a business has enough short-term resources to pay the bills due within a year.
What the current ratio means
The current ratio is a quick test of short-term financial health, also called liquidity. It compares what the business owns that will turn into cash within a year with what it owes within a year.
Current ratio = current assets ÷ current liabilities
Current assets include cash, money owed by customers (debtors), stock and prepayments. Current liabilities include suppliers, VAT and PAYE owed, Corporation Tax due, overdrafts and loan repayments due within 12 months. Both figures sit on the balance sheet.
Example
A wholesale business has this at its year end:
| Current assets | Current liabilities | ||
|---|---|---|---|
| Cash at bank | £18,000 | Trade creditors | £22,000 |
| Trade debtors | £35,000 | VAT and PAYE | £9,000 |
| Stock | £27,000 | Corporation Tax | £14,000 |
| Total | £80,000 | Total | £45,000 |
The current ratio is £80,000 ÷ £45,000 = 1.78. The business has £1.78 of short-term assets for every £1 of short-term debts.
A stricter version, the quick ratio or acid test, leaves out stock because it may take time to sell: (£80,000 − £27,000) ÷ £45,000 = 1.18. Still above 1, so the business could pay its bills even if stock sold slowly.
Why it matters for your business
Banks and lenders look at the current ratio when deciding whether to lend, and suppliers may use it in credit checks on your filed accounts. A ratio below 1 means short-term debts exceed short-term assets, which can signal cash pressure even when the business is profitable. A very high ratio can mean cash or stock is sitting idle rather than working.
There is no single right number. Between 1.2 and 2 is comfortable for many small businesses, but a café that is paid in cash immediately can run safely on a lower ratio than a consultancy waiting 60 days for invoices to be paid.
How to improve it
Collect debts faster, avoid paying for long-term assets out of short-term cash, convert an overdraft into a longer-term loan, and keep stock lean. Watching the ratio in your monthly management accounts gives you warning before a problem shows up in the bank balance.
Track it alongside cash flow rather than on its own.
Common questions
Many small businesses aim for between 1.2 and 2. Below 1 means short-term debts exceed short-term assets. The right level depends on the industry and how quickly customers pay, so it is most useful compared over time and with similar businesses.
The quick ratio, or acid test, removes stock from current assets because stock may not turn into cash quickly. It is a stricter measure, particularly useful for retailers and wholesalers holding a lot of stock.