Calculating liquidity: Formula, examples & liquidity ratios 2026

Key takeaways

• Liquidity describes your company's ability to meet short-term payment obligations on time at all times. It is the basis for growing in an agile and predictable way.
• It is calculated using three liquidity ratios: liquidity ratio 1 (cash and cash equivalents only), ratio 2 (plus short-term receivables), and ratio 3 (plus inventory).
• The basic logic is always the same: you divide the available funds by the short-term liabilities and multiply by 100 to get a percentage.
• Healthy benchmarks: Liquidity ratio 1 around 20 to 30%, liquidity ratio 2 100 to 120%, liquidity ratio 3 at least 120% (ideally 150 to 200%). These values vary depending on the source and industry.
• Liquidity is not the same as profit. A profitable company can remain solvent or run into a bottleneck depending on when money actually flows.
• Balance sheet ratios are a snapshot. For good decision-making, supplement them with ongoing, forward-looking liquidity planning, for example using software like Tidely.

What does liquidity mean?

Liquidity is your company's ability to meet due payments on time at all times. It measures how quickly and easily assets can be converted into cash to pay invoices, salaries, taxes, and suppliers. The higher your liquidity, the more agile your company is.

The time perspective is crucial. A full order book is valuable, but it doesn't help if customer payment isn't received for 60 days and salaries are due next week. Liquidity therefore answers a very specific question: Is there enough money available at the right time?

Good liquidity is not an end in itself, but a competitive advantage. Companies with a solid liquidity buffer can buy at better prices, take advantage of early payment discounts, invest in growth, and negotiate from a position of strength.

How can you calculate liquidity?

You calculate liquidity by comparing short-term available funds with short-term liabilities. Because not every asset can be turned into cash at the same speed, business management uses three graduated metrics, known as liquidity ratios.

So there isn't just one liquidity formula, but three levels that build on each other:

• Liquidity ratio 1: cash and cash equivalents in relation to short-term liabilities.
• Liquidity ratio 2: cash and cash equivalents plus short-term receivables in relation to short-term liabilities.
• Liquidity ratio 3: cash and cash equivalents plus receivables plus inventory in relation to short-term liabilities.

The logic behind this is simple: the higher the ratio, the more assets are included, and the higher the value usually is. The lower the ratio, the stricter and more conservative the metric.

Internationally, the three ratios are referred to as Cash Ratio (ratio 1), Quick Ratio (ratio 2), and Current Ratio (ratio 3). This is also how they are defined in the Gabler Business Encyclopedia.

The chart below shows how the three liquidity ratios are structured. Each bar sums up the assets included in the respective ratio: for ratio 1, only cash and cash equivalents (€50,000); for ratio 2, additionally short-term receivables (€90,000); and for ratio 3, additionally inventory (€120,000).

The red line represents short-term liabilities (€80,000), i.e., what needs to be paid in the short term. If a bar extends beyond the red line, the liabilities are covered. For ratio 1, the bar remains below it; from ratio 2 onwards, solvency is mathematically ensured.

In short: calculating liquidity means comparing available and short-term realizable funds with short-term liabilities. The three liquidity ratios show your solvency from three perspectives: from a strict look at bank balances (ratio 1) to a comprehensive view including inventory (ratio 3).

Calculating liquidity ratio 1: formula and example

Liquidity ratio 1 (cash liquidity, cash ratio) shows what proportion of your short-term liabilities you can cover immediately with cash and cash equivalents. It is the strictest of the three metrics because it only considers immediately available money.

Formula:

Cash Ratio = cash and cash equivalents ÷ current liabilities × 100

Cash and cash equivalents include cash on hand, bank balances, and highly liquid assets such as checks. Receivables and inventory are intentionally excluded here.

Example: Your company has 50,000 euros in its business account. Current liabilities amount to 80,000 euros.

50,000 euros ÷ 80,000 euros × 100 = 62.5%

Interpretation: You could immediately pay off 62.5% of your current liabilities using your own cash.

Context for classification: A value of 20 to 30% is generally considered healthy for the cash ratio (up to about 50% depending on the industry). At 62.5%, you are above this range. This does not pose a risk to solvency, but it does suggest that a relatively large amount of money is sitting idle in your account that could be invested or put into an interest-bearing account.

Calculating the quick ratio: formula and example

The quick ratio (acid-test ratio) also takes into account current receivables—amounts that your customers are expected to pay shortly. For many companies, this is the most practical metric because it reflects not just today's bank balance, but also realistic incoming payments.

Formula:

Quick Ratio = (cash and cash equivalents + current receivables) ÷ current liabilities × 100

Example: In addition to the 50,000 euros in cash and cash equivalents, there are 40,000 euros in current receivables. Current liabilities remain at 80,000 euros.

(50,000 euros + 40,000 euros) ÷ 80,000 euros × 100 = 112.5%

Interpretation: A value of 100 to 120% is considered healthy.

At 112.5%, your company is expected to be able to fully cover its current liabilities, provided that customers pay on time. This is exactly where the practical leverage lies: receivables are only liquid if they are actually received by the due date.

Calculating the current ratio: formula and example

The current ratio also includes inventory, providing the most comprehensive view of short-term solvency. Inventory includes, for example, raw materials, consumables, work-in-progress, finished goods, and advance payments made.

Formula:

Current Ratio = (cash and cash equivalents + current receivables + inventory) ÷ current liabilities × 100

Example: In addition to the 50,000 euros in cash and cash equivalents and 40,000 euros in receivables, your company holds inventory worth 30,000 euros. Current liabilities amount to 80,000 euros.

(50,000 euros + 40,000 euros + 30,000 euros) ÷ 80,000 euros × 100 = 150%

Interpretation: A value of at least 120% is considered solid, with 150% to 200% (1.5 to 2.0) being ideal—though only if the inventory can actually be sold quickly.

Because inventory cannot be converted into cash immediately, the current ratio (liquidity of the 3rd degree) is less useful for short-term decision-making than the cash ratio and quick ratio.

Good to know: At Tidely, the focus is intentionally on the cash ratio and quick ratio, as these reflect the cash flows you can work with directly in your day-to-day business.

Exercise: Calculating liquidity of the 1st, 2nd, and 3rd degree using an example

The best way to understand the three degrees of liquidity is to calculate them all at once using the same figures. We will use the values from the examples above and compare the results side by side.

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What is the main takeaway from this example?
That you should look at all three degrees together. The company is solvent: the 2nd degree (112.5%) and the 3rd degree (150%) are in a healthy range. At 62.5%, the 1st degree is above the benchmark of 20% to 30%. This doesn't pose a risk to solvency; rather, it indicates that there is a lot of money sitting idle in the account that you could invest or put into an interest-bearing account.

Calculating liquidity from the balance sheet

To calculate liquidity, take the necessary figures from the current assets and current liabilities in your balance sheet. The structure follows the classification of current assets according to Section 266 of the German Commercial Code (HGB). Here is how you assign balance sheet items to the three degrees of liquidity:

• Cash and cash equivalents: Cash on hand, bank balances, and checks from current assets.
• Current receivables: primarily trade receivables with a remaining term of up to one year.
• Inventory: raw materials, consumables, and supplies, work in progress, finished goods, and merchandise.
• Current liabilities: trade payables, short-term bank liabilities, and other liabilities with a remaining term of less than one year.

You can find these items in two places on the balance sheet. On the assets side, under current assets, you will find cash and cash equivalents, receivables, and inventory. On the liabilities side, you will find the liabilities, of which you only consider the current ones with a remaining term of up to one year. You then use these values to assemble the respective formulas.

A quick example: If your balance sheet shows 50,000 euros in cash and cash equivalents, 40,000 euros in receivables, and 30,000 euros in inventory under current assets, and these are offset by 80,000 euros in current liabilities, you have exactly the values needed to calculate the liquidity of the 1st, 2nd, and 3rd degree. You can find these figures in your annual financial statements or, during the year, in the trial balance or the BWA (business evaluation) from your accounting department.

The balance sheet is a great tool for determining liquidity ratios in a structured and transparent way. However, it has one important limitation you should be aware of: It only shows a single reporting date, and by the time the statement is available, that date is often weeks or months in the past. It does not reveal how your liquidity will develop in the coming weeks. More on that later.

Calculating free liquidity

Free liquidity shows how much money is actually available for you to use after all due short-term payments have been deducted. It is less of a classic balance sheet ratio and more of a practical management tool for everyday operations.

Unlike liquidity ratios, which express a relationship as a percentage, free liquidity is a concrete euro amount. It doesn't tell you how good your ratios look, but rather how much money you could actually spend today without jeopardizing any upcoming payments.

A simple approximation is:

Free liquidity = available cash and cash equivalents + open credit lines − due current liabilities

An example: You have 50,000 euros in your account and an open credit line of 20,000 euros, while 40,000 euros in salaries, rent, and invoices are due in the next few days. Your free liquidity is then 50,000 + 20,000 − 40,000 = 30,000 euros. You can only freely dispose of this amount; the rest is already earmarked.

Free liquidity thus answers the question that really matters in your day-to-day business: How much room do I have right now to invest, restock inventory, or make a special repayment without endangering my solvency?

Important note: Only count credit lines that are actually available, and do not include money that is already earmarked for things like upcoming taxes or payroll. And because your account balance and liabilities change daily, free liquidity is not a one-time calculation. It is most meaningful when you track it on an ongoing basis.

Calculating liquidity with Excel

Excel is a good starting point for calculating and monitoring your liquidity. With a structured template, you can quickly capture key metrics and see whether your company is on a solid financial footing.

Download our free Excel template for liquidity planning and enter your figures. This will give you a clean foundation for regular analysis.

However, Excel quickly reaches its limits as your company grows:
It offers no automatic bank integration, no real-time data, and is prone to errors when data is entered manually. If you want to manage your liquidity efficiently and proactively, specialized software is the next logical step.

Tools like Tidely synchronize account data automatically and reduce the weekly time spent on these tasks by an average of 51%, which equates to about 4 hours per week. This is confirmed by the Tidely user survey in which 125 Tidely customers were interviewed.

Would you like to compare different software options to find the right one for you? We recommend the following article:

Recommended reading: The 10 best liquidity planning tools compared for 2026

Understanding liquidity: What are healthy levels?

Healthy liquidity depends heavily on your industry and business model. As a general guideline, aim for around 20 to 30% for the cash ratio (1st degree), 100 to 120% for the quick ratio (2nd degree), and at least 120% (ideally 150 to 200%) for the current ratio (3rd degree). These values vary depending on the source and industry. Here is how to interpret your figures:

• Values over 100% (excluding 1st degree): Your company can safely cover its short-term liabilities. However, very high values, especially in the 1st degree, may indicate unused capital that could be deployed more productively.
• Values below the benchmark: a sign to take a closer look. It may make sense to collect outstanding receivables faster, extend payment terms for expenses, or build up liquid assets strategically.
• Comparing ratios: Look at the 1st and 2nd degree liquidity together to get a complete picture. The 3rd degree adds context but is less useful for short-term decision-making.

However, two things are more important for your assessment than the absolute value:

• First, the industry: In retail and e-commerce, for example, a lot of capital is tied up in inventory, so the 3rd degree is naturally higher, while the 1st degree is often lower. For service providers and agencies, there is hardly any inventory, so the 2nd and 3rd degrees are closer together.
• Second, the trend: A stable or rising value over several months is more telling than a single snapshot. Therefore, compare your liquidity with the previous period and with your industry, rather than just a general benchmark.

Why does liquidity deviate from the benchmark?

If a liquidity ratio is below the benchmark, it is usually due to tied-up or delayed cash, not a lack of revenue. The most common causes:

• Late customer payments: Outstanding receivables are not turning into cash on time.
• High inventory levels: Capital is tied up in stock that is selling slowly.
• High short-term liabilities: for example, when long-term investments are financed with short-term debt.
• Unexpected expenses: Repairs or additional payments can quickly drain liquid assets.
• Lack of credit lines: without a buffer, every fluctuation immediately impacts liquidity.
• Seasonal fluctuations: Income and expenses do not align in terms of timing.
• Rapid growth: Companies growing quickly often have to pay for materials, staff, and upfront costs before revenue comes in. Paradoxically, liquidity often becomes tighter, not more abundant, during growth phases.

It is important to distinguish between temporary deviations (such as seasonal fluctuations) and structural ones inherent in the business model. You can bridge the former, but you must fundamentally address the latter.

How can you strategically strengthen your liquidity?

If your liquidity is outside your target range, there are several effective levers:

• Collect receivables faster: agree on shorter payment terms and issue invoices promptly.
• Negotiate payment terms on the expense side: securing longer terms with suppliers provides breathing room—the counterpart to faster receivables collection.
• Optimize costs: review fixed costs and renegotiate terms with suppliers.
• Keep inventory lean: free up capital tied up in stock.
• Manage working capital: look at receivables, inventory, and payables together, as that is exactly where the tied-up capital lies.
• Utilize financing options: make targeted use of overdraft lines or factoring.
• Plan ahead: monitor liquidity continuously to identify room for maneuver early and avoid liquidity bottlenecks.

‍Important: Not all levers are equally effective. Factoring or selling unused assets can provide quick relief, but they don't address the root cause. Sustainable improvements come from better processes: prompt invoicing, clear payment terms, and ongoing planning that identifies bottlenecks early on.

Why liquidity is not the same as profit

Profit and liquidity are two different things: Profit shows what has been earned after deducting all costs, while liquidity shows how much cash is currently available. These two figures can diverge, and the reason lies in accounting itself.

The profit and loss statement records revenue as soon as you issue an invoice, not when the money actually arrives. Conversely, investments or loan repayments reduce your bank balance without affecting profit, while depreciation lowers profit without any cash outflow. This regularly creates a gap between what you have earned and what is actually in your account.

An example: You issue invoices totaling 100,000 euros in January and are highly profitable on paper. However, if your customers don't pay for 60 days while salaries, rent, and taxes are due now, your account could be empty even though your P&L shows a profit. In Germany, 45% of all B2B invoices are paid late (Intrum, 2024), and it is precisely these delays that create the gap.

The opposite case is also possible: A company can report losses and still remain solvent, for example, because a loan or a down payment brings in fresh cash. Both scenarios show the same thing: Profit alone says nothing about solvency. That is why it is worth keeping an eye on liquidity alongside your profit figures.

The good news: If you know your cash flows, you can take targeted action long before a late payment becomes a problem.

In practice: The most critical phases are rarely the months with low sales. They are the weeks when large expenses, such as advance tax payments or annual insurance premiums, coincide with delayed customer payments. Proactive liquidity monitoring makes these overlaps visible early on.

The limitations of classic liquidity ratios

Classic liquidity ratios derived from the balance sheet or management accounts are valuable, but they only ever provide a snapshot of a past reporting date. They are based on historical data and say little about how your liquidity will develop over the coming weeks. You should keep three weaknesses in mind:

• Reporting date effect: These figures can be deliberately manipulated. Paying off outstanding liabilities or delaying payments just before the balance sheet date improves the ratio mathematically without changing the actual situation.
• Quality of receivables: The quick ratio assumes that all receivables will be paid on time. If a delinquent or insolvent customer is included, the ratio is too optimistic. The sheer volume of receivables says nothing about their collectability.
• Assumption of liquidity: The current ratio includes inventory as if it could be turned into cash at any time. In practice, some stock is difficult to sell or can only be sold at a discount.

Furthermore, static ratios do not capture the decisive dynamic factors: outstanding payments, new liabilities, and expected cash flows. For forward-looking decisions, you therefore need a supplement that takes ongoing cash inflows and outflows into account.

This is another reason why it is worth taking a closer look: A strong equity base alone is no substitute for liquidity planning. The average equity ratio for SMEs is 30.7% (KfW, 2025), but equity is on the balance sheet, not in the bank account. This is exactly where a dynamic approach, as shown in the next section, comes in.

Calculate and plan liquidity dynamically with Tidely

Tidely complements classic liquidity ratios with a dynamic, forward-looking view of your solvency. Instead of a single reporting date, the software works with actual inflows and outflows, which come directly from your bank accounts and connected accounting systems.

This is how you calculate and plan your liquidity on an ongoing basis, rather than just looking back:

• AI onboarding and forecasting in 15 minutes: Tidely synchronizes your transactions, the AI automatically sorts them into a clean category tree, identifies trends in your historical cash flows, and suggests plan values for the next 24 months based on the last 12 months.
• Automatic bank connection: Connection to over 5,000 banks as well as accounting and ERP systems with daily synchronization.
• AI-powered auto forecast: automatic liquidity forecasting based on your historical cash flows.
• Scenario comparisons: Compare best, base, and worst-case scenarios with just a few clicks.
• Dashboard with real-time KPIs: daily updated overview of your entire financial position.
• Flexible time views and reporting: from a 21-day view and 13-week planning to a strategic annual overview, including PDF and Excel reports at the touch of a button.‍

Also new is the direct DATEV integration. This allows your accounting data to flow automatically into Tidely without you having to manually transfer documents or reports. Especially if your accounting runs through DATEV or your tax advisor uses it, you save yourself the double entry: the data from your financial accounting is immediately available in your liquidity plan.

Tidely is developed in Germany, GDPR-compliant, and ISO 27001 certified. Data is stored on German servers with bank-level encryption.

The industry standard shows just how reliable forward-looking planning is: in the first four weeks, a rolling 13-week plan achieves over 95% forecast accuracy (GTreasury, 2025). In Tidely, you can create one now with a single click.

‍Frequently asked questions about liquidity calculation

How do you calculate liquidity?

You calculate liquidity using the three liquidity ratios. Divide your available funds by your current liabilities and multiply by 100. The 1st degree uses only cash and cash equivalents, the 2nd degree adds short-term receivables, and the 3rd degree adds inventory.

How do I calculate the cash ratio (liquidity 1st degree)?

Cash ratio = cash and cash equivalents ÷ current liabilities × 100. Example: 50,000 euros in cash divided by 80,000 euros in liabilities equals 62.5%. A healthy benchmark is around 20 to 30%.

How do I calculate the quick ratio (liquidity 2nd degree)?

Quick ratio = (cash and cash equivalents + short-term receivables) ÷ current liabilities × 100. This ratio is considered healthy at 100 to 120%, as it means liabilities are covered by cash and expected short-term payments.

What role do short-term receivables play in calculating liquidity?

Short-term receivables are included in the calculation starting from the 2nd degree of liquidity. They represent money you expect to receive soon. However, they only improve the ratio in reality if your customers pay on time. Therefore, you should always evaluate them with a realistic view of payment behavior.

What is the difference between the 1st, 2nd, and 3rd degree of liquidity?

The three degrees differ in which assets are included. The 1st degree counts only cash, the 2nd adds short-term receivables, and the 3rd adds inventory. With each degree, the value increases, but the certainty that the funds are immediately available decreases.

How do you calculate liquidity from the balance sheet?

You take cash, receivables, and inventory from current assets and compare them to current liabilities. The balance sheet provides a clear structure for this, but only shows a snapshot in time. For ongoing management, you should supplement it with forward-looking liquidity planning.

Can a company be profitable and still not be liquid?

Yes. Profit and liquidity are different metrics. A profitable company can temporarily have too little money in the bank, for example, if customers pay late or capital is tied up in inventory. That is why profit analysis should always be accompanied by a look at liquidity.

How often should a company calculate its liquidity?

Ideally, on an ongoing basis. A simple snapshot from the balance sheet is not enough for management. Those who update their liquidity at least weekly or use a tool with automatic bank integration can identify opportunities and bottlenecks early enough to act. For corporations, an early warning system to detect risks to the company's existence is legally required anyway (Section 1 StaRUG).

Sources

• HGB: Section 266 Structure of the balance sheet
• Gabler Business Dictionary: Liquidity ratios 
• StaRUG: Section 1 Crisis early detection and crisis management
• KfW: SME Panel 2025
• Intrum: European Payment Report, 2024
• GTreasury: 13-Week Cash Flow Forecasting, 2025