Current Ratio: Can Your Business Comfortably Pay Its Bills?
When Emily opened her boutique marketing agency, things took off quickly. Her clients loved her work, but six months in she was feeling the crunch. Between payroll, rent, and supplier invoices, cash was always tight.
Her accountant pointed her toward one simple number that revealed the truth: her current ratio.
Seeing Your Liquidity Clearly
The current ratio measures whether your business can cover its short-term obligations with its short-term assets.
Formula: Current Assets ÷ Current Liabilities
If you have $120,000 in cash, receivables, and inventory, and owe $80,000 in bills due within the next year, your current ratio is 1.5.
That means you have $1.50 available for every $1 you owe soon.
Why It Matters for Small Business Owners
A healthy current ratio gives you breathing room—it’s your buffer against unexpected costs or a slow month of sales.
A ratio below 1.0 means you owe more in the near term than you can easily pay; a ratio above 2.0 might mean you’re holding too much idle cash or stock.
For most small businesses, the sweet spot is between 1.2 and 2.0.
Too low = risk of missed payments or borrowing stress.
Too high = cash sitting still instead of working for you.
Real-World Example
Imagine Emily’s Agency has:
Current assets: $90,000 (cash + receivables)
Current liabilities: $70,000 (credit cards, supplier bills, taxes payable)
Her current ratio = 90,000 ÷ 70,000 = 1.29.
She’s just above the safe zone—tight, but not critical.
After tightening payment terms with clients and renegotiating one supplier contract, she lifted it to 1.6 within three months, easing the daily pressure.
Tips to Improve Your Current Ratio
Speed up collections. The faster clients pay, the higher your ratio climbs.
Delay non-urgent purchases. Time new spending after receivables come in.
Build a small cash reserve. Even a modest buffer prevents short-term crunches.
Watch seasonal swings. Retailers and contractors often need higher ratios before busy periods.
Avoid borrowing just to cover bills. Fixing cash flow is stronger than adding debt.
The Takeaway
Your current ratio is your liquidity report card. It tells you whether you’re living paycheck to paycheck as a business—or managing cash confidently.
Even small improvements can transform stress into stability.
Worried your short-term finances feel too tight?
Reach out and talk to ANR Advisor— we’ll help you analyze your liquidity and strengthen your cash position before problems arise.
