The acid-test ratio—sometimes called the quick ratio—is a financial metric that’s often overlooked but can quickly signal whether a business is prepared to weather short-term financial storms. With the economic landscape in Australia shifting rapidly in 2025, understanding and monitoring this ratio has never been more important for business owners, investors, and lenders alike.
Why the Acid-Test Ratio Matters in 2025
Australian businesses face a unique set of challenges this year. Higher interest rates, tightening credit, and evolving regulations have all put pressure on cash flows. The acid-test ratio comes into focus as a fast, reliable way to measure a company’s ability to pay its immediate obligations—without relying on selling inventory.
With the Reserve Bank of Australia keeping rates at a decade-high 4.35% as of early 2025, banks are scrutinising business liquidity more closely than ever. The acid-test ratio has become a common checkpoint for loan approvals, credit line renewals, and investment due diligence.
- RBA’s 2025 guidance has made it clear: banks must prioritise liquidity risk when assessing business loans.
- ASIC’s updated guidelines for small business lending now require a deeper look at short-term solvency ratios, including the acid-test.
- Supply chain disruptions in late 2024 and early 2025 have made inventory less reliable as a liquidity source, making the acid-test ratio even more relevant.
How the Acid-Test Ratio Works—and What It Reveals
The acid-test ratio is calculated as:
(Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Unlike the current ratio, it excludes inventory and prepaid expenses, focusing only on assets that can be converted to cash almost immediately. A ratio of 1.0 or higher usually indicates that a business can cover its current liabilities without selling inventory—an important sign of financial strength.
Consider two examples from 2025:
- Tech Startup in Sydney: With a quick ratio of 1.8, this company easily covers its short-term debts, making it attractive to venture capitalists wary of cash flow crunches.
- Manufacturing Firm in Melbourne: Despite strong sales, its acid-test ratio sits at 0.7 due to heavy reliance on inventory. When a key supplier was delayed in March 2025, the business struggled to pay suppliers and missed out on a major contract extension.
Most lenders and investors in Australia now expect to see acid-test ratios above 1.2, particularly in sectors like construction, retail, and technology where cash flow is king.
Improving Your Acid-Test Ratio: Strategies for 2025
If your business’s acid-test ratio is below the industry benchmark, 2025 is the time to act. Here’s how:
- Accelerate Receivables: Tighten credit terms and follow up on overdue invoices. Consider digital invoicing tools that sync with Australian payment platforms.
- Manage Payables Strategically: Negotiate longer payment terms with suppliers, especially those with stable relationships.
- Build a Cash Buffer: Redirect a portion of profits into a high-interest business savings account, taking advantage of the 2025 rate environment.
- Limit Unnecessary Expenses: Audit subscriptions and vendor contracts for cost-cutting opportunities.
- Reassess Inventory: Transition to a just-in-time approach to reduce cash tied up in stock, especially in sectors vulnerable to supply chain volatility.
Some Australian fintech lenders now offer products that reward higher acid-test ratios with lower rates or larger credit facilities, making liquidity management a direct path to better financing terms.
The Bottom Line: Don’t Ignore This Ratio
The acid-test ratio is more than just an accounting formula—it’s a real-world pulse check for business survival. As Australia’s economy continues to evolve in 2025, businesses that monitor and manage their quick ratio will have a clear advantage when it comes to accessing capital, navigating uncertainty, and seizing new opportunities.