Another financial literacy term, and one which is very important to you on your daily journey of finances in your non-profit organization is the quick ratio. Watch today’s Monday Money Moments video for more (and skim the transcript below).
Dana Miller (00:02): Welcome to another rendition of Monday Money Moments with myself, your host, Dana Miller from Executive Financial Insights.
(00:11): Today, we are talking about another financial literacy term, very important to you on your daily journey of finances in your organization. And that’s called the quick ratio. Don’t get scared. It’s not too terrifying. And it’s actually something you’re probably already doing and there is actually a term for it.
(00:33): The quick ratio is a balance. It comes from the balance sheet and it is an evaluation of how you can pay your immediate bills with cash and quick resources on hand. It is an indicator of your company’s ability to pay off your short term debt with short term resources on hand, if you will.
(01:00): So think of it this way: I’m going to give you the ratio itself of how we calculate it. Take all your cash that you have on hand (available cash), your marketable securities, (things that you could turn around today, say, you have a CD or a money market, something that you could quickly convert to cash). So those two things — cash, marketable securities — and your current accounts receivable (how much money you’re expecting to collect in the next 30 days).
(01:31): All of that added together goes in the numerator. Okay. That’s on top. And then underneath, the denominator, is your current liability (how much you owe to your vendors).
(01:46): Ideally, no, not ideally, always. You want this ratio to be higher than one. And think of it this way. If you have a hundred dollars in cash and you owe a hundred dollars to vendors, then 100 divided by 100 is 1; that means you can at least take the cash you have on hand and pay your vendors. Perfect. Mostly perfect. Good. Let’s put it that way. What would be perfect would be having $200 in cash and owing $100 – even better. Then you can pay off your short term liabilities and still have some cash left for growing the organization, paying into the future, investing all the fun things that we want to do with cash, right?
(02:32): So now, you know your measure of comfort, your minimum measure of comfort and being able to sleep at night is at least 1.0 on your cash to liabilities. And for your investors and the sign of healthy organization, anything better than 1.0 (like 2.0!) Is perfect.
(02:53): There we go. That’s your quick ratio and I appreciate your time for further information and resources, please visit me at www.executivefinancialinsights.com. Thank you.
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