Data to Dollars: What Each Metric Means & How to Use It to Drive More Profits: Series #3 - Current 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.
#3 - Current Ratio
What It Is -
The Current Ratio measures your ability to pay off what you owe within the next 12 months or less to those you owe it to using your short term assets (cash, accounts receivable, inventory, other liquid assets).
In formal terms, it’s the ability to pay short-term liabilities (like vendor bills, subcontractor payments, or credit card balances) with your short-term assets (like cash, accounts receivable, or inventory).
How we calculate it -
Current Ratio = Current Assets ÷ Current Liabilities
For example, if your business has $200,000 in current assets and $150,000 in current liabilities:
Current Ratio = $200,000 ÷ $150,000 = 1.33
This means you have $1.33 in available assets for every $1.00 of debt, putting you in a healthy liquidity position.
Why We Track It -
The Current Ratio is a critical measure of cash flow health. While metrics like NPM tell you if you’re profitable on paper, the Current Ratio reveals if you have enough cash or liquid assets to cover your immediate financial obligations.
For residential construction companies, this is especially important because projects often involve fluctuating cash flow due to large upfront costs, delayed payments, and retainage.
Why You Need to Know It -
Tracking your Current Ratio helps you:
Avoid Cash Flow Crises: A low Current Ratio is an early warning sign of potential financial strain.
Strengthen Financial Planning: Knowing your liquidity helps you make smarter decisions about when to take on new projects or investments.
Build Credibility with Lenders: A strong Current Ratio demonstrates financial stability, making it easier to secure loans or favorable credit terms.
What the Current Ratio Tells You
Good: A Current Ratio between 1.2 and 2.0 is considered healthy. It shows you have enough short-term assets to cover liabilities without tying up too much cash.
Bad: A Current Ratio below 1.0 means you may struggle to meet financial obligations.
Too High (>2.0): Surprisingly, this can also be a problem. It suggests you might have too much cash or receivables tied up, which could be reinvested for growth.
Action Steps Based on Your Current Ratio -
If Your Current Ratio Is Healthy (1.2-2.0):
Maintain consistent cash flow management.
Plan ahead for seasonal changes or project-based cash flow fluctuations.
Consider reinvesting excess liquidity into growth opportunities like new equipment, marketing, or hiring.
If Your Current Ratio Is Low (<1.0):
Speed Up Collections: Focus on improving accounts receivable turnover by invoicing promptly and following up on overdue payments.
Evaluate Vendor Terms: Negotiate longer payment terms with suppliers to reduce immediate liabilities.
Cut Unnecessary Expenses: Audit your overhead and operational costs for savings opportunities.
If Your Current Ratio Is Too High (>2.0):
Reinvest Excess Cash: Don’t let cash sit idle—use it to fund growth initiatives.
Optimize Inventory Levels: Excessive inventory can tie up cash unnecessarily.
Conclusion
Your Current Ratio isn’t just a snapshot of your financial health—it’s your early warning system for cash flow issues and your guide to making smart financial decisions.
By tracking this metric consistently, you’ll know if your business is in a strong position to grow, or if adjustments are needed to protect your cash flow and stay ahead of financial challenges.
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 cash flow metric to help you operate smoothly while driving profitability to scale your business!
