Finance – Understanding the Current Ratio

At this year’s Business Partner Summit, ReSound’s Sarah Aesoph and Jonathon McGiverin, took a deep dive into helping you better understand the financial aspects of your practice by defining the fundamentals of financial management. In particular, they broke down the basics of the balance sheet, income statement and cash flow statement, what they mean and what to measure. In fact, there is a great blog post on “Practice Financial Management” from the archives that walks you through each statement.

Today, we want to help take your financial understanding a bit deeper and focus on one aspect of measuring the ‘here and now’ financial health of the business – the current ratio. Calculated from the balance sheet, the current ratio is a snapshot of a practice’s ability or lack of ability to meet its short-term obligations. Short-term is anything due or expected within one year.   The current ratio, if too high, can also be a sign of the practice not efficiently managing its current assets or capital.  The current ratio is industry specific and we recommend that practices shoot for a current ratio of 1.5.

Here is how to calculate your practice’s current ratio:

Current Ratio = Current Assets/Current Liabilities

From the balance sheet, current assets is the sum of:

  • Cash
  • Accounts Receivable
  • Inventory
  • Prepaid Assets

And, current liabilities is the sum of:

  • Accounts Payable
  • Accrued Expenses
  • Payroll Taxes and With-holdings

Financial management is a critical piece to practice success. Managed properly, practices can more easily have the resources to take advantage when market opportunities present themselves. The current ratio is a quick go-to measurement of your practice’s current financial health.

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