Reading Beyond the Bank Balance with the Current Ratio

The path ahead may look steady — but is your foundation built to carry it?

Breathing is easier when cash is sitting in the bank. But liquidity isn’t just about how much you have — it’s about how much you’ll need. And how soon you’ll need it.

Plenty of founders check the cash balance and think: “We’re good for now.”

But what if payables are stacking up? Or are customer payments slower than usual? The number in your bank account might not tell the whole story.

This is where the Current Ratio steps in.

It doesn’t measure how much cash you have — it measures how well you can cover what’s coming due in theory and practice.

If your team is planning cash use, navigating vendor negotiations, or prepping for investor scrutiny, this metric quietly signals how close you are to a cash crunch or how comfortably you're positioned to meet upcoming obligations.

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Current Ratio: Can You Cover What’s Coming?

The Current Ratio compares your current assets (things that will turn into cash soon) to your current liabilities (what you’ll need to pay soon). It asks: Do you have enough short-term resources to cover your short-term obligations?

Unlike cash on hand — which is just a snapshot — the Current Ratio offers a forward glance. It helps spot cash tightness before it shows up in your bank account, and gives you a clearer read on your operational health, not just your cash position.

Formula:

Current Ratio = Current Assets ÷ Current Liabilities

How to Read the Current Ratio

• A ratio above 1.0 typically means you can cover upcoming bills.

• A ratio below 1.0 means trouble may be closer than it looks.

• A high ratio like 2.5 may suggest strong liquidity or excess idle assets, such as aging AR, that aren’t working hard enough.

• A low ratio like 0.8 can reveal stress points — even if your cash balance looks fine today.

• A sudden change can flag operational slowdowns, tighter payment terms, or one-time swings, all of which deserve a closer look.

Where It’s Used:

• Internal cash risk assessment

• Vendor management and negotiating power

• Loan covenants and financial reporting

• Board and investor reviews

What’s Included in Current Assets:

• Cash and cash equivalents

• Accounts receivable (AR) (if collectible - see limitations section)

• Prepaid expenses (may not help liquidity - see limitations section)

• Inventory (only if expected to sell - see limitations section)

• Other assets expected to convert to cash within 12 months.

What’s Included in Current Liabilities:

• Accounts payable (AP)

• Credit card balances

• Accrued expenses (e.g., payroll, taxes)

• Short-term loans or debt due within 12 months

• Deferred revenue expected to be earned soon

Strengths:

• Simple, clear snapshot of short-term financial strength

• Helps anticipate pressure before it hits

• Widely used in credit analysis and diligence reviews.

Limitations & Common Pitfalls:

• Timing mismatches can distort the picture. If your bills are due before your receivables arrive, you may look fine on paper but still run into a cash crunch. Always pair this metric with a short-term cash forecast.

• One-time swings can skew results. A delayed vendor payment or big customer deposit might make one month look artificially strong (or weak). Leave it in — just document it, and don’t make decisions based on that month.

• The trendline is what matters. A single Current Ratio number doesn’t mean much. What’s meaningful is whether it’s holding steady, improving, or falling month after month.

• Not all receivables are created equal. If customers are slow to pay — or may never pay — your AR inflates the ratio without backing it up in cash. Be realistic. Exclude amounts you’re unlikely to collect, and always subtract expected bad debts.

• Inventory isn’t always liquid. If you’re sitting on slow-moving or outdated stock, it may not convert to cash anytime soon. Don’t count inventory unless it’s likely to sell and help with short-term obligations.

• Prepaid expenses rarely help with liquidity. These are already paid for and can’t be used to cover bills. They usually shouldn't be included unless they directly offset something coming due.

• If your numbers swing a lot, consider averaging monthly inputs. Instead of averaging the ratio itself, total the past 3–6 months of current assets and current liabilities (using month-end balances), then calculate the ratio from those combined totals. This gives seasonal businesses (like hospitality or travel) a clearer picture than relying on a single month.

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Final Thought:

Cash alone doesn’t give you the whole picture.

Current Ratio is the lens that zooms in on timing, obligations, and your ability to respond. It reveals the gap — or overlap — between what’s coming in and what’s going out. And in that space lies your operational breathing room.

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Need Help Tracking This Inside Odoo?

Brett J. Federer Accounting helps SaaS and RaaS teams structure liquidity metrics like Current Ratio directly into your reporting — no clutter, no confusion.

When it’s time to put your working capital to work, Brett J. Federer Accounting will help you track the important signals.