Current Ratio vs Quick Ratio — Which to Use?
The current ratio includes all current assets, including inventory and prepaid expenses that may take time to convert to cash. The quick ratio is stricter — it excludes inventory and prepaid expenses, focusing on cash and near-cash assets. For businesses with significant inventory, the quick ratio is a more conservative liquidity measure.
For SaaS and services businesses with minimal inventory, current ratio and quick ratio are nearly identical. For manufacturing, retail, and distribution businesses with significant inventory, the quick ratio is the more meaningful liquidity test.
Deferred Revenue and the Current Ratio
SaaS companies that bill annually include deferred revenue in current liabilities (services not yet rendered). This artificially depresses the current ratio for healthy SaaS businesses. When analysing SaaS liquidity, some analysts exclude deferred revenue from current liabilities on the grounds that it represents future service delivery obligations, not cash obligations.
What Lenders Check First
When businesses apply for credit lines, most lenders run the current ratio as an early filter. A current ratio below 1× may result in higher interest rates, more restrictive covenants, or outright rejection. Maintaining a healthy current ratio isn't just good financial management — it's essential for access to debt capital.
Loan covenants often include minimum current ratio requirements (commonly 1.2× or 1.5×). Breaching a covenant can trigger acceleration of the loan and demands for immediate repayment. Monitor your current ratio continuously against any covenant thresholds.
1.5–2×
Typical lender minimum current ratio
2×
Target current ratio for healthy businesses
1.2×
Common loan covenant minimum
Quick
Exclude inventory for conservative liquidity view