Current Ratio Explained: Can Your Business Cover Its Bills?
When a buyer looks at your company, one of their first questions is simple: can this business pay its bills? The current ratio gives a quick answer.
It’s a liquidity metric that compares what your business owns in the short term (cash, receivables, inventory) to what it owes in the short term (bills, wages, and short-term debt). A healthy ratio tells buyers your company isn’t stretched thin and has the stability to keep operating smoothly.
At Breakwater M&A, we work with founders of service businesses ($2M–$20M revenue) to strengthen these key ratios before going to market — because confidence in your numbers leads to better offers.
What Is the Current Ratio?
The current ratio shows whether your business has enough short-term assets to cover short-term liabilities.
Formula: Current Ratio = Current Assets ÷ Current Liabilities
In plain English: if all your bills came due tomorrow, could you pay them with what you have on hand?
The Gold Standard
A current ratio of 2.0 or higher is considered strong. That means you have $2 in current assets for every $1 in current liabilities.
Anything lower than 1.0 means liabilities outweigh assets — a red flag for buyers.
Why Buyers Care
When buyers review your current ratio, they’re really looking at:
Stability – Does the company have breathing room, or is it always scrambling for cash?
Risk – A low ratio signals higher risk of default or cash crunches.
Confidence – A strong ratio gives buyers assurance they won’t need to inject cash immediately post-acquisition.
Put simply: the healthier your liquidity, the more attractive your business looks in an M&A process.
How to Improve the Current Ratio
If your ratio is below the benchmark, there are practical ways to improve it:
Collect receivables faster – tighten credit terms or follow up more actively.
Reduce short-term debt – refinance into longer-term structures where possible.
Build a cash buffer – maintain reserves for flexibility.
Manage inventory – avoid tying up cash in slow-moving stock.
These steps not only improve financial health but also signal to buyers that your business is disciplined and well-managed.
Final Word
The current ratio is a simple but powerful measure of short-term financial health. A strong number tells buyers your business can meet its obligations, manage risk, and provide a stable platform for growth.
If you’re considering selling your business in the next 1–3 years, improving your current ratio can be the difference between average offers and top-tier outcomes.
📈 Want to sell your business?
At Breakwater M&A, we help founders of $2M–$20M revenue businesses sell for maximum value with minimal stress.
Learn more and book your discovery call HERE