Current Ratio

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.