Renzo DemartiniIn short
- Tie every ratio input to a record at one date, and complete the liability side before reading the result.
- Keep management exclusions in a separate bridge, because they change availability and not the reported ratio.
- Compare what is available with what is due, then record the accountant’s review and the owner’s decision.
A current ratio of 2.00 reads as comfortable. A new site, an equipment order or a hire is about to draw on it.
Before the owner approves, the inputs behind the ratio need to agree to records, and what is actually available needs to be shown apart from the reported figure.
Reconcile the reporting date
Every input to the 2.00 current ratio agrees to a record at 31 October 2026
| Reported input | Amount | Supporting record |
|---|---|---|
| Cash | A$120,000 | Reconciled bank accounts |
| Receivables | A$180,000 | Aged invoice listing |
| Inventory | A$180,000 | Stock count and valuation |
| Prepayments | A$20,000 | Prepayment schedule |
| Current assets | A$500,000 | Agreed ledger total |
| Current liabilities | A$250,000 | Schedule in the next section |
Sample balances at 31 October 2026. Current ratio is A$500,000 ÷ A$250,000 = 2.00.
Illustrative figures, not client data.
Business Queensland gives current ratio = current assets ÷ current liabilities. Here A$500,000 over A$250,000 is 2.00.
Use one date across every schedule and keep the ledger export and reconciliation references. A balance sheet pictures the business at a given moment. It cannot show future availability on its own.
Complete the liability side
Four liability lines make A$250,000, each with an owner who confirms it
| Input | Amount | Evidence owner |
|---|---|---|
| Supplier balances | A$140,000 | Purchasing and finance |
| Accrued wages | A$40,000 | Payroll and finance |
| Other current accruals | A$20,000 | Finance |
| Current borrowing portion | A$50,000 | Finance and accountant |
| Total | A$250,000 | Finance lead |
Illustrative figures, not client data.
Ask purchasing about unposted supplier bills. Ask payroll which period the wages cover. Ask finance to reconcile borrowing classifications with the agreements.
business.gov.au says current liabilities ‘are due and payable within one year’. The accountant reviews the classification. This is general information, not accounting or legal advice. AASB 101, as amended, says an entity ‘classifies its financial liabilities as current when they are due to be settled within twelve months after the reporting period’. Do not remove a liability because you expect to negotiate it later.
Show availability separately
Management exclusions cut A$500,000 of current assets to an A$250,000 available pool
| Movement | Amount | Evidence and treatment |
|---|---|---|
| Reported current assets | A$500,000 | Ledger starting point |
| Restricted cash excluded | −A$20,000 | Restriction evidence |
| Disputed receivables excluded | −A$30,000 | Invoice dispute register |
| Inventory excluded | −A$180,000 | Needs a sale, then collection |
| Prepayments excluded | −A$20,000 | No cash receipt expected |
| Proposed available pool | A$250,000 | Management view only |
Illustrative figures, not client data.
The reported ratio stays at 2.00. This bridge is a management view, not a revised accounting ratio. Ask the accountant whether the disputes need an accounting adjustment, and record any approved journal separately.
Stock and invoices count at book value, not on the day they turn into cash. Business Queensland’s quick ratio excludes inventory, as its infographic transcript also shows. Agree one definition before you compare periods.
Add the growth commitment
After an A$40,000 deposit the pool covers 0.84 of what is due within a year
| Item | Amount | Treatment |
|---|---|---|
| Available pool before the order | A$250,000 | Management estimate |
| Current liabilities due | A$250,000 | From the reconciled schedule |
| Cover before the order | 1.00 times | Pool ÷ liabilities |
| Equipment deposit | −A$40,000 | Proposed cash payment |
| Available pool after the deposit | A$210,000 | Pro forma, not cash in the bank |
| Cover after the deposit | 0.84 times | A$210,000 ÷ A$250,000 |
| Balance of the A$100,000 order | A$60,000 | Separate payment date needed |
Sample. The pool is unrestricted cash and undisputed receivables, set against every current liability, before any trading inflows.
Illustrative figures, not client data.
The A$210,000 pool is not cash in the bank. It includes receivables and says nothing about collection dates.
The remaining A$60,000 needs a payment date. Take these assumptions into the dated cash forecast. Growth costs belong in the profit forecast too, and estimated costs are labelled clearly.
Keep the decision attached
The owner defers the deposit until the dispute treatment and payment forecast are settled
| Role | Recorded conclusion |
|---|---|
| Accountant | Reported classifications checked; dispute treatment awaits evidence |
| Operations lead | Equipment order totals A$100,000; installation plan attached |
| Finance lead | Payment-date forecast awaits confirmed collections |
| Owner | Defer the deposit until both open items are resolved |
Illustrative figures, not client data.
A ratio is supporting evidence, not approval. Keep the reported calculation, the management exclusions and the commitment schedule together.
This paper tests short-term availability. It does not choose a debt and equity mix. The management reporting article shows how to keep evidence with the decision.
What to do first
One proposed commitment is enough to test whether the ratio inputs hold
- 01Pick one commitment
A site, an equipment order or a hire you are weighing now.
- 02Tie each input to a record
One reporting date, with the ledger export and reconciliation references.
- 03List the exclusions apart
Restricted, disputed and slow items, kept out of the reported figures.
- 04Compare the pool with what is due
Then add the commitment and its payment dates.
- 05Record the review and the decision
The accountant’s conclusion and the owner’s call, together.
Start with the commitment closest to approval.
Common questions
Is a current ratio of 2 enough to approve growth?
No fixed threshold approves a commitment. Business Queensland says ratio targets may differ depending on your business situation and industry.
Why does inventory change the reading?
Stock needs a sale and then collection before it is cash. Business Queensland’s quick ratio leaves out inventory, and the current ratio counts it.
Can liquidity ratios replace a cash forecast?
No. A ratio describes one date. CPA Australia notes that ratios ‘do not necessarily identify the timing of cash flow’. A dated forecast tests the order of receipts and payments.
Chartered Accountant (CA ANZ) and finance executive, based in Canberra. Practical AI and automation for SMEs, and adviser to owners, CEOs and boards on integration and finance.