Current Ratio
Do you know and regularly calculate your organization’s Current Ratio?
Working Capital
If you haven’t already, I encourage you to read the article: Working Capital.
In that article, we explore this important concept. This is a good “companion” article to this article.
If you recall, Working Capital is defined as Current Assets minus Current Liabilities.
The Key is Current
As you will see, the key word from above is Current. Meaning, Current Assets and Current Liabilities.
So, by definition, the Current Ratio is equal to Current Assets divided by Current Liabilities.
Example
Note: In the examples to follow, you can add or subtract zeros depending on how they apply to your situation.
Let’s assume your:
Current Assets = $250,000 and Current Liabilities = $200,000. This equates to 1.25 (e.g., $250,000/$200,000).
Current Assets = $200,000 and Current Liabilities = $250,000. This equates to 0.80 (e.g., $250,000/$300,000).
Current Assets = $250,000 and Current Liabilities = $250,000. This equates to 1.0 (e.g., $250,000/$250,000).
Understanding and Measuring
As you might infer, it’s a good thing if your Current Assets exceed your Current Liabilities.
Use the following scale to gauge your performance.
Great
Ratio > 1.00
Good
Ratio = 1.00
Needs Improvement
Ratio < 1.00
Conclusion
Calculating your Current Ratio is one thing. Measuring and monitoring your it is quite another.
Be encouraged to calculate it monthly. And, pray and plan to plot a course for improvement. For you and your organization, the key is to look at the trend. God willing, you want to see a steady trend of improvement.
Contact us if you have any questions. We would love to hear from you.
JUL
About the Author:
Ken Moll is the Principal and Founder of Blue Elevator®. With professional experience spanning four decades, Ken has a breadth of foundational business knowledge rarely found – making him part of an elite class of professionals. Ken's passion is helping clients of Blue Elevator® get their “business to the next level™.”