What is the cash ratio?

The cash ratio measures a company's ability to pay all current liabilities with cash and cash equivalents, excluding receivables and other current assets. The formula divides cash and equivalents by current liabilities. A ratio of 1.0 means you can cover every current obligation with cash on hand. It is the most conservative liquidity measure.

Stress-testing your immediate liquidity

Imagine every receivable froze. Could you cover current obligations with cash alone? Most professional service firms land between 0.5 and 1.5. A value below 0.5 indicates heavy reliance on collecting receivables. A value above 1.5 suggests excess cash sitting idle.

The hidden cost of too much cash

Cash earning 4% while your business could generate 30% returns represents inefficient capital allocation. Challenge yourself: why is this cash sitting here? If no good answer emerges, consider distributions, debt paydown, or strategic investment.