Quick ratio
The quick ratio compares current assets without inventory with current liabilities. The result gives an impression of short-term payment capacity, but says nothing definitive about collectability.
What does quick ratio mean?
The quick ratio compares current assets without inventory with current liabilities. The result gives an impression of short-term payment capacity, but says nothing definitive about collectability.
The quick ratio leaves inventory out of the liquid short-term assets. The coverage calculated this way also depends on the quality of receivables and the term of liabilities. Variants exist with other adjustments; state your formula.
How does it work?
The quick ratio divides current assets without inventories by current liabilities. In the numerator remain receivables, securities and cash and cash equivalents, the items of art. 2:370 through 2:372 DCC. Inventory falls away because it first has to be sold and then collected. The KVK (Dutch Chamber of Commerce) calls a result of at least 1 good and in its example counts only receivables and cash and cash equivalents.
The law does not prescribe the ratio and gives no formula. The annual accounts must, however, give insight into liquidity as far as their nature permits (art. 2:362(1) DCC). If you include the figure in the annual documents, state the definition and calculation; the Guidelines ask for this for key figures that do not follow directly from the annual accounts (RJ 430).
Example
A wholesale BV has € 100.000 of current assets: inventory € 35.000, receivables € 45.000, other receivables € 6.000 and bank € 14.000. Current liabilities are € 50.000. Quick ratio: (100.000 − 35.000) / 50.000 = 1,3. Then € 15.000 of the receivables proves older than ninety days and probably uncollectable; that amount is written down. Before the write-down the current ratio is 100.000 / 50.000 = 2,0 and the quick ratio 1,3. After the write-down they are 85.000 / 50.000 = 1,7 and 1,0 respectively; the difference stays 0,7 because of the inventory.
In the annual accounts
Key figure derived from the balance sheet; not a prescribed balance sheet item.
Difference from the current ratio
The current ratio counts all current assets, the quick ratio leaves out inventory. For a service provider without inventory the two are equal. For a trading company the difference shows how much of the short-term coverage depends on sales yet to take place.
Common mistakes
- Leaving inventory in the numerator after all
- Treating all receivables as immediately collectable
What to watch for
- Use the receivables after deduction of the write-down for uncollectability.
- Also include in the denominator the repayment that falls due within twelve months on a long-term loan.
- Micro shows on the balance sheet only the total of current assets (art. 2:395a(4) DCC); you then take the inventory from the bookkeeping. From small upwards it is a separate item on the balance sheet (art. 2:364(3) DCC).
- You can recalculate with the ratio calculator.
Legal basis and source
no separate statutory ratio
Frequently asked questions
What is a good quick ratio?
The KVK calls 1 or higher good. See that as a rule of thumb: a business paid at the till can manage with less than a business invoicing on sixty days.
Does a current-account credit count as a current liability?
Yes. A credit drawn at the bank counts in the denominator; in its example the KVK counts it as short-term debt capital.
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Preparing Dutch annual accounts?
Your first set of annual accounts is free, for every size class. Create an account and prepare the annual accounts of your Dutch company under Title 9 of Book 2 of the Dutch Civil Code.
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