Current Ratio | Futureproof
Current Ratio
Quick Definition
A liquidity ratio measuring ability to pay short-term obligations with current assets.
What is Current Ratio?
Current Ratio compares current assets (cash, receivables, inventory) to current liabilities (payables, short-term debt). It answers: can you pay your bills coming due in the next 12 months?
Why Current Ratio Matters
Lenders and investors use current ratio as a quick health check. A ratio below 1.0 means you have more short-term obligations than liquid assets to cover them, a warning sign of potential cash problems.
For SaaS founders, current ratio typically looks strong because you have deferred revenue on the liability side but few inventory or receivable concerns. For ecommerce founders with significant inventory, the ratio can be misleading since slow-moving inventory inflates current assets.
How to Calculate Current Ratio Step by Step
Step 1: List all current assets from your balance sheet.
- Cash: $280,000
- Accounts receivable: $65,000
- Prepaid expenses: $18,000
- Total Current Assets: $363,000
Step 2: List all current liabilities.
- Accounts payable: $42,000
- Accrued wages: $55,000
- Deferred revenue: $120,000
- Short-term loan: $25,000
- Total Current Liabilities: $242,000
Step 3: Divide.
- Current Ratio = $363,000 ÷ $242,000 = 1.50
Right at the lower end of healthy. You have $1.50 in current assets for every $1 in obligations.
Step 4: For SaaS, consider the deferred revenue adjustment. Deferred revenue ($120K) is a liability because you've been paid but haven't delivered. But you'll earn it by providing the service — you won't return the cash. Adjusted ratio excluding deferred revenue:
- Adjusted = $363K ÷ ($242K - $120K) = $363K ÷ $122K = 2.97 — much healthier
Common mistakes founders make:
- Panicking about a low current ratio when deferred revenue is the main liability (common in SaaS)
- Including illiquid assets in current assets (e.g., inventory that won't sell for 6 months)
- Not comparing to industry norms (SaaS vs ecommerce have very different typical ratios)
Interpreting the Ratio
Generally, 1.5 to 2.0 is considered healthy. Below 1.0 signals potential liquidity problems. Above 3.0 might indicate inefficient use of working capital.
Formula
Current Ratio = Current Assets / Current Liabilities
Current Assets = Cash + Receivables + Inventory + Prepaid Expenses
Current Liabilities = Payables + Short-term Debt + Accrued Expenses
Example
Your SaaS company has:
- Current Assets: $500,000 (cash $300K, receivables $200K)
- Current Liabilities: $250,000 (payables $100K, deferred revenue $150K)
Current Ratio = $500,000 ÷ $250,000 = 2.0
You have $2 in current assets for every $1 in short-term obligations. That is a healthy liquidity position.