Nonprofit Accounting Basics

Ratios: Current Ratio

This ratio tells you how many times current (within 12 months) assets could cover current liabilities. A value of 1 or better indicates that current liabilities could be covered by current assets. The basic formula for this ratio is:

                  Current Assets ÷ Current Liabilities

Signal:  Positive is better than negative; upward trend is good, 3 to 5 range is good, although over 5 may indicate that current assets may not be used most strategically; downward trend may be cause for concern.

Calculation:  Receivables due over twelve months in the future are considered long-term and should be excluded from the current assets amount. Similarly, portions of liabilities that are not due within twelve months should be excluded from the current liabilities amount.

Caveat:  This ratio is a snapshot of one moment in time and may be most reliable in trend.