Data to Dollars: What Each Metric Means & How to Use It to Drive More Profits: Series #14 - Quick Ratio
When I first started working with builders on their financials, I’d walk into our meetings armed with accurate data, detailed reports, and carefully tracked metrics. I was confident and excited to share what I’d uncovered, knowing these numbers could transform their business.
But there was a problem: I might as well have been speaking another language. It became very clear very quickly that my clients didn’t just struggle to understand the reports—they didn’t know what the metrics meant, let alone what actions to take, if any.
By the time I explained the significance of the metric, I’d already lost their focus. And the worst part? We never got to the best part—the actionable insights that could actually drive their dollars to meet their goals!
Enter: The Data to Dollars Series and The Playbook for Builder Profitability! In this series, we’ve broken down the key metrics residential construction companies need to track, what they mean for your business, and—most importantly—what to do with them to drive profitability and growth. We’re currently taking every metric covered in the series and packaging them altogether into one Playbook especially for Builders. Armed with this Playbook, you’ll know exactly what to do when with what you find in your financial reports.
Let’s dive into this week’s metric and see how it can help you turn some data into dollars.
#14 - Quick Ratio
What It Is -
Quick Ratio, also known as the Acid-Test Ratio, measures your company’s ability to meet short-term liabilities using only its most liquid assets.
How we calculate it -
Quick Ratio = (Current Assets - Inventory) ÷ Current Liabilities
For custom home builders, liquid assets include cash, accounts receivable, and other short-term assets easily convertible to cash. Inventory and prepaid expenses are excluded because they’re less liquid.
Why We Track It -
The Quick Ratio gives a more conservative view of liquidity than the Current Ratio by focusing only on assets that can quickly be turned into cash. It’s especially important for construction companies with long project timelines and delayed receivables.
Why You Need to Know It -
The Quick Ratio helps answer:
Can you meet your immediate obligations without relying on selling inventory or waiting on receivables?
Are you financially stable enough to handle short-term cash crunches?
A ratio of 1.0 or higher is generally considered healthy, indicating you have at least $1 of liquid assets for every $1 of liabilities.
What the Quick Ratio Tells You -
Good: A ratio of 1.0 or higher means your business is well-positioned to cover short-term liabilities.
Bad: A ratio below 1.0 signals potential liquidity issues, meaning you might struggle to meet obligations without additional inflows.
Action Steps Based on the Quick Ratio -
If Quick Ratio Is Healthy (≥ 1.0):
Maintain strong collections and ensure liquid assets remain stable.
Use your position to invest strategically in growth initiatives.
If Quick Ratio Is Low (< 1.0):
Improve Collections: Follow up on overdue accounts receivable to increase liquid assets.
Reevaluate Expenses: Postpone non-essential spending to free up cash.
Consider Short-Term Financing: Use lines of credit or other financing options to cover gaps temporarily.
If Quick Ratio Fluctuates:
Track Patterns: Seasonal fluctuations or delays in receivables may be driving volatility.
Align Payment Terms: Renegotiate payment schedules with vendors and subcontractors to smooth out cash flow.
Optimize Cash Management: Use real-time tracking tools to monitor liquidity more effectively.
Conclusion-
The Quick Ratio is a crucial indicator of your company’s short-term financial health. By tracking it, you’ll gain the clarity to navigate cash crunches, plan for obligations, and maintain stability while growing.
At Catalyst Construction Accounting & Consulting (Catalyst CAC), we specialize in helping residential construction businesses just like yours track and understand key metrics like GPM and more. Whether you need help with construction bookkeeping (data accuracy, essential construction financials), construction controllership (holistic oversight over construction financial processes & strategic financial guidance), or a construction CFO advisor (forward-looking, strategic, big-picture financial guidance), we’ll work with you to eliminate financial chaos and give you the tools to drive profitability and growth.
Let us help you turn your data into dollars. Contact us today to learn how we can become your valued partner in building a stronger, more profitable business.
What’s Next -
Stay tuned for the next episode in the Data to Dollars Series as we uncover yet another metric to help you operate smoothly while driving profitability to scale your business!
