Quick assets: Meaning, examples and how to calculate

Have you ever wondered how companies measure whether they have enough money to pay their bills immediately? Businesses often rely on something called quick assets to figure this out. What exactly are quick assets, and why do they matter?

In this article, we’ll take a closer look at what quick assets are and how to calculate them, along with some simple examples. Understanding the meaning of quick assets is essential for anyone looking to start or invest in a business.

• Table of contents

• What are quick assets?
• The basics of quick assets
• List of quick assets for a business
• Classification of quick assets
• How to calculate quick assets and the quick ratio
• How to calculate Quick Ratio
• Example of quick assets: The quick ratio
• Quick assets vs. current assets

What are quick assets?

To put it in simple terms, quick assets are things a company owns that can be turned into cash very quickly, usually within 90 days or less. These assets help companies pay bills and debts immediately, making them crucial for daily operations.

A few important points about quick assets:

• They are easily converted into cash.
• Used to measure financial health in the short term.
• Exclude things like inventory, because selling inventory might take too long.

The basics of quick assets

The following points capture the basics of quick assets:

• Quick assets measure how well a company can meet its short-term debts or bills.
• It tells us if the company has enough immediate money available.
• The higher the quick assets, the safer the company usually is in terms of short-term financial health.

Think of quick assets as the money in your wallet or savings account. This money can be accessed easily whenever you need it urgently.

Read Also: What is an asset class?

List of quick assets for a business

Here’s a simple and clear list of common quick assets for most businesses:

• Cash and bank balances: Money already in the bank or on hand.
• Accounts receivable: Money customers owe to the business that will soon be received.
• Marketable securities: Investments that can be quickly sold, like short-term bonds or easily tradable shares.

Classification of quick assets

Quick assets can be classified into three simple groups:

1. Cash and equivalents
   • Currency notes, bank balances, and other cash-like items.
2. Receivables
   • Payments expected from customers soon.
3. Investments easily sold
   • Short-term bonds, mutual funds, or shares quickly convertible into cash.

These classifications clearly show the liquidity of different types of quick assets.

How to calculate quick assets and the quick ratio

Calculating quick assets is fairly straightforward using this formula:

Quick Assets = Cash & equivalents + Accounts Receivable + Marketable Securities

Once you've found your quick assets, you can then calculate the Quick Ratio, also called the "acid-test ratio." It clearly shows how strong a company's financial position is in the short term.

How to calculate Quick Ratio:

Quick Ratio = Quick Assets / Current Liabilities

A quick ratio higher than 1 means the company can easily pay its short-term debts. Less than 1 means it might struggle.

Example of quick assets: The quick ratio

Let's take an example to illustrate how quick assets work:

Suppose a company has:

• Cash: Rs. 50,000
• Accounts receivable: Rs. 20,000
• Short-term investments: Rs. 30,000
• Current liabilities (short-term bills): Rs. 80,000

Step 1: Calculate quick assets using the formula
Quick Assets = Rs. 50,000 + Rs. 20,000 + Rs. 30,000 = Rs. 1,00,000

Step 2: Calculate Quick Ratio using the formula
Quick Ratio = Rs. 1,00,000 ÷ Rs. 80,000 = 1.25

Because the quick ratio is 1.25 (higher than 1), this means the company can easily cover its short-term debts.

Read Also: Asset Allocation: Meaning, Importance and Example

Quick assets vs. current assets

People often confuse quick assets with current assets. Let’s take a look at the key differences between the two:

• Quick assets: Include only assets that can quickly turn into cash within 90 days or less (like cash, receivables, marketable securities). They’re a sub-set of Current Assets which are more liquid in nature.
• Current assets: Include all quick assets plus inventory, prepaid expenses, and other items that can be converted to cash within a year or the accounting period. Inventory isn't counted as a quick asset because it usually takes more time to sell.

In short, all quick assets are current assets, but not all current assets are quick assets.

Conclusion

Quick assets are an essential tool to clearly understand a company's immediate financial health. Knowing how to identify quick assets and calculate the quick ratio helps investors and businesses quickly check whether they have enough cash-like assets to pay short-term bills. This ensures that businesses stay stable even during financial difficulties. Understanding quick assets is easy, practical, and crucial for making sound financial decisions.

FAQs

Why are inventories excluded from quick assets?

Inventories aren't counted as quick assets because selling them takes longer and might be difficult during emergencies. Quick assets must be easily convertible into cash immediately or within a short time.

Why is the quick ratio considered a crucial metric in financial analysis?

The quick ratio clearly shows how well a company can pay immediate debts without relying on inventory sales. This helps in quickly understanding financial stability, especially during emergencies.

Under what circumstances may a company's high quick ratio be detrimental?

A very high quick ratio may mean the company has too much idle cash, which isn't earning profits. It could indicate inefficient use of assets, meaning the company isn't investing enough to grow or expand its business.

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