Cash Ratio (Liquidity Ratio 1) for SMEs

Solvency is vital to the survival of any business. Even profitable companies can run into trouble if they are unable to pay their bills on time. The current ratio—also known as the cash ratio or cash liquidity—measures precisely this short-term solvency.

What is the current ratio?

Liquidity Ratio 1 shows the extent to which your company could cover its short-term liabilities using only its liquid assets. Liquid assets include cash on hand, bank balances, and securities that can be sold in the short term.

This ratio is the strictest of the three liquidity ratios. It considers only the money that is immediately available—without including accounts receivable or inventory.

Why is the first liquidity ratio important?

For SMEs, short-term liquidity is often more critical than long-term profitability. Suppliers, wages, and taxes must be paid on time. Falling behind on these payments quickly jeopardizes business relationships and can lead to a serious crisis.

Liquidity Ratio 1 helps you gain a realistic picture of your current ability to pay. Banks also frequently use this metric in credit assessments.

Calculation of Liquidity Ratio 1

The formula is simple: You divide cash and cash equivalents by current liabilities and multiply the result by 100. Current liabilities include all obligations with a remaining term of less than one year—for example, accounts payable, tax liabilities, or short-term bank loans.

A concrete example

Let’s assume your company has 80,000 Swiss francs in cash and cash equivalents. Current liabilities amount to 400,000 Swiss francs. Liquidity ratio 1 is calculated as follows: 80,000 divided by 400,000 times 100 equals 20 percent.

This means that you could immediately settle 20 percent of your short-term debt using your own funds. For the remaining 80 percent, you would have to rely on receivables, inventory, or other sources of financing.

What is a good value?

As a rule of thumb, liquidity ratio 1 should be between 10 and 30 percent. A value that is too low may indicate acute payment difficulties. However, a value that is significantly too high is also not ideal—it shows that your company may have too much capital sitting unused in accounts instead of putting it to productive use.

It is important to note that liquidity ratio 1 alone does not provide a complete picture. It should always be considered in conjunction with liquidity ratios 2 and 3, as well as cash flow.

Limitations of the metric

Liquidity ratio 1 is merely a snapshot of the balance sheet. Seasonal effects, payments received shortly before the reporting date, or one-time special effects can significantly distort the picture. It also does not take into account whether significant incoming or outgoing payments are due in the coming weeks.

Continuous liquidity planning—beyond a mere snapshot at the reporting date—is therefore essential for SMEs. Findea is happy to support you in continuously monitoring your liquidity and planning proactively.

The Complete Guide at a Glance

This article is part of our comprehensive series on the most important financial ratios for Swiss SMEs. In the complete guide to the 10 most important financial ratios for SMEs, you’ll find all key figures at a glance—from profitability and liquidity to financing structure.

Formula: Cash Ratio

Cash Ratio (%) = (Cash and Cash Equivalents ÷ Current Liabilities) × 100

Cash and Cash Equivalents = Cash on Hand + Bank Balances + Marketable Securities