# Current Ratio

## Quick Definition

A liquidity ratio measuring ability to pay short-term obligations with current assets.

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## 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.

## Related Terms

[**Quick Ratio (Acid Test)**  
A stringent liquidity measure excluding inventory, showing ability to meet obligations with most liquid assets.  
Learn more](/content/terms/quick-ratio-acid-test/index.html)

[**Working Capital**  
The difference between current assets and current liabilities, measuring ability to fund daily operations and meet short-term obligations.  
Learn more](/content/terms/working-capital/index.html)

[**Runway**  
The amount of time a company can continue operating at its current burn rate before running out of cash.  
Learn more](/content/terms/runway/index.html)

## Learn More About Current Ratio

[Finance **Deferred Revenue for SaaS: When Cash Collected Isn't Revenue Earned**  
Deferred revenue is one of the most misunderstood line items on a SaaS balance sheet. This guide covers how it works, how to account for it properly, and why investors pay close attention to it.  
Read article](/content/blog/deferred-revenue-saas-guide/index.html)

[Finance **SaaS Revenue Recognition and ASC 606: A Practical Guide for Founders**  
ASC 606 determines when and how SaaS companies recognize revenue. This guide covers the five-step framework, common SaaS scenarios, and how to avoid the mistakes that delay fundraising.  
Read article](/content/blog/saas-revenue-recognition-asc-606/index.html)