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 all due payments on time, at all times. It measures how quickly and easily assets can be converted into cash to cover invoices, payroll, taxes, and supplier bills. The higher your liquidity, the greater your business's financial flexibility.

Timing is everything. A full order book is great, but it won’t help if the customer pays in 60 days and payroll is due next week. That’s why liquidity answers one crucial question: Is there enough cash 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 assets against short-term liabilities. Because not all assets can be converted into cash at the same speed, financial analysis uses three tiered 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 it is simple: The higher the tier, the more assets are included, and the higher the value usually is. The lower the tier, the stricter and more conservative the metric.

Internationally, these three tiers are known as the Cash Ratio (1st degree), Quick Ratio (2nd degree), and Current Ratio (3rd degree). This is also how they are defined in standard business encyclopedias like the Gabler Wirtschaftslexikon.

The chart below illustrates how the three liquidity ratios build on each other. Each bar aggregates the assets included in the respective ratio: the 1st degree includes only cash and cash equivalents (€50,000), the 2nd degree adds short-term receivables (€90,000), and the 3rd degree further adds 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 readily realisable funds against short-term liabilities. The three liquidity ratios examine your solvency from three perspectives: from a strict focus on cash at bank (1st degree) to a comprehensive view that includes inventory (3rd degree).

Calculating liquidity ratio 1: formula and example

The cash ratio (liquidity of the 1st degree) shows the percentage of your short-term liabilities that can be covered immediately using liquid funds. It is the most conservative of the three metrics because it only accounts for instantly accessible cash.

Formula:

Cash ratio = cash and cash equivalents ÷ short-term 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 in its business bank account. Short-term liabilities amount to €80,000.

€50,000 ÷ €80,000 × 100 = 62.5%

Interpretation: You could immediately pay off 62.5% of your short-term liabilities using readily available cash.

Benchmark context: A cash ratio of 20% to 30% is typically considered healthy (up to around 50% depending on the industry). At 62.5%, you are well above that range. While this poses no risk to your solvency, it suggests that a significant amount of idle cash is sitting in your account that could instead be invested or put to work earning interest.

Calculating the quick ratio: formula and example

The quick ratio (liquidity of the 2nd degree) also factors in short-term receivables—amounts due from customers in the near future. For many businesses, this is the most practical metric because it reflects not just today's bank balance, but also realistic incoming cash flows.

Formula:

Quick ratio = (cash and cash equivalents + short-term receivables) ÷ short-term liabilities × 100

Example: In addition to €50,000 in liquid assets, you have €40,000 in short-term receivables. Short-term liabilities remain at €80,000.

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

Interpretation: A value between 100% and 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 (liquidity of the 3rd degree) also includes inventory, providing the most comprehensive view of short-term solvency. Inventory includes raw materials, supplies, work in progress, finished goods, and advance payments made to suppliers.

Formula:

Current ratio = (cash and cash equivalents + short-term receivables + inventory) ÷ short-term liabilities × 100

Example: In addition to €50,000 in liquid funds and €40,000 in receivables, your company holds inventory worth €30,000. Current liabilities amount to €80,000.

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

Interpretation: A value of at least 120% is considered solid; ideally, it should fall between 150% and 200% (1.5 to 2.0)—though only if your 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: Tidely focuses specifically on the cash ratio and quick ratio (first and second degree liquidity) because these reflect the cash flows you work with directly in day-to-day operations.

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 your liquidity, take the required figures from current assets and current liabilities on your balance sheet. The breakdown follows the structure of current assets under Section 266 of the German Commercial Code (HGB). Here is how you map balance sheet items to the three liquidity ratios:

• 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 in cash and equivalents, €40,000 in receivables, and €30,000 in inventory under current assets, set against €80,000 in current liabilities, you have the exact figures needed to calculate the cash, quick, and current ratios. You can find these numbers in your annual financial statements or, during the year, in your trial balance or monthly management accounts (BWA).

The balance sheet is well-suited for calculating liquidity ratios in a structured and transparent way. However, it has one key limitation you should be aware of: It only captures a single reporting date, which is often weeks or months in the past by the time the financial statements are prepared. It won't tell you how your liquidity will evolve in the weeks ahead. More on that later.

Calculating free liquidity

Available liquidity shows how much money is genuinely at your disposal after deducting all due short-term obligations. Rather than being a traditional balance sheet ratio, it serves as a practical management metric for daily 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 in your account and an open credit line of €20,000, while €40,000 in payroll, rent, and invoices are due over the coming days. Your available liquidity is 50,000 + 20,000 − 40,000 = €30,000. You can only freely deploy this amount; the rest is already committed.

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?

Keep in mind: Only factor in credit lines that are truly available, and don't count funds already allocated for upcoming expenses like taxes or payroll. Since your bank balances and liabilities shift daily, available liquidity isn't a one-off calculation. It delivers the most value when tracked on an ongoing basis.

Calculating liquidity with Excel

Excel is a solid starting point for calculating and keeping track of your liquidity. With a structured template, you can quickly record key metrics and assess whether your business is on solid financial footing.

Download our free Excel cash flow planning template and enter your numbers. This gives you a reliable 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 automatically sync bank data and reduce the weekly time spent on cash flow management by an average of 51%—saving about 4 hours per week. This was confirmed by the Tidely user survey, which polled 125 Tidely customers.

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 Cash Flow Management Tools Compared for 2026

Understanding liquidity: What are healthy levels?

What constitutes healthy liquidity depends heavily on your industry and business model. As a general benchmark, aim for around 20% to 30% for the cash ratio, 100% to 120% for the quick ratio, and at least 120% (ideally 150% to 200%) for the current ratio. These figures vary across sources and industries. Here is how to interpret your numbers:

• 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 falls below the benchmark, it is usually due to tied-up or delayed cash rather than a lack of revenue. The most common causes include:

• 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 measures deliver the same impact. Factoring or selling idle assets provides quick breathing room, but won't solve the underlying issue. Sustainable improvements come from stronger processes: prompt invoicing, clear payment terms, and rolling forecasts that flag bottlenecks well in advance.

Why liquidity is not the same as profit

Profit and liquidity are two different things: profit shows what remains after all costs are deducted, while liquidity shows how much cash is available right now. The two figures can diverge significantly, and the reason lies in the nature of 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 €100,000 worth of invoices in January and appear highly profitable on paper. However, if your clients take 60 days to pay while payroll, rent, and taxes are due immediately, your account may run dry even though the P&L reports a profit. In Germany, 45% of all B2B invoices are paid late (Intrum, 2024)—and delays just like these open that cash gap.

The reverse is also possible: A business can operate at a loss yet remain fully solvent—for instance, if an injection of cash comes through a loan or customer deposits. Both scenarios highlight the same reality: profit alone tells you nothing about solvency. That is why it pays to keep a close eye on liquidity alongside your profitability metrics.

The good news: if you know your cash flows, you can take targeted action long before a delayed payment turns into a real problem.

From experience: the most critical phases are rarely the low-revenue months. It’s the weeks where major expenses like quarterly tax prepayments or annual insurance premiums coincide with delayed customer payments. Forward-looking liquidity planning makes these exact overlaps visible well in advance.

The limitations of classic liquidity ratios

Traditional liquidity ratios from the balance sheet or monthly management reports are valuable, but they only ever provide a snapshot at a single past reporting date. They rely on historical data and tell you little about how your liquidity will develop over the coming weeks. You should keep three key 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’s worth taking a closer look: a solid equity base alone is no substitute for liquidity planning. The average equity ratio among SMEs is 30.7% (KfW, 2025), but equity sits on the balance sheet, not in your bank account. This is precisely where a dynamic approach comes in, as shown in the next section.

Calculate and plan liquidity dynamically with Tidely

Tidely complements traditional liquidity ratios with a dynamic, forward-looking view of your solvency. Instead of relying on a single reporting date, the software works with actual cash inflows and outflows drawn 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.‍

Another new feature is the direct DATEV integration. This allows your accounting data to flow automatically into Tidely without the need to manually transfer receipts or reports. Especially if your accounting runs on DATEV or your tax advisor uses it, you eliminate duplicate effort: financial accounting data is instantly available right 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.

Industry benchmarks show just how reliable forward-looking planning really is: in the first four weeks, a rolling 13-week forecast achieves over 95% forecast accuracy (GTreasury, 2025). With Tidely, you can now create one with a single click.

‍Frequently asked questions about calculating liquidity

How do you calculate liquidity?

You calculate liquidity using the three liquidity ratios. Divide the available assets by short-term liabilities and multiply by 100. The cash ratio (1st degree) uses only liquid funds, the quick ratio (2nd degree) adds short-term receivables, and the current ratio (3rd degree) also includes inventory.

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

Cash ratio (1st-degree liquidity) = liquid funds ÷ short-term liabilities × 100. Example: €50,000 in liquid funds divided by €80,000 in liabilities equals 62.5%. A healthy benchmark is typically around 20% to 30%.

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

Quick ratio (2nd-degree liquidity) = (liquid funds + short-term receivables) ÷ short-term liabilities × 100. This metric is generally considered healthy at 100% to 120%, as liabilities are fully covered by cash and expected short-term incoming payments.

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

Short-term receivables are factored into the calculation starting from the quick ratio (2nd degree). They represent money you expect to receive shortly. However, they only genuinely improve the ratio if your customers pay on time. That's why 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 ratios differ based on which assets are included. The 1st degree considers only liquid funds, the 2nd degree adds short-term receivables, and the 3rd degree further incorporates inventory. As you move from one ratio to the next, the value increases, but the certainty that those funds are immediately available decreases.

How do you calculate liquidity from the balance sheet?

You take liquid funds, receivables, and inventory from current assets and set them against short-term liabilities. The balance sheet provides a structured overview, but it only captures a single point in time. For ongoing management, you should complement it with forward-looking liquidity planning.

Can a company be profitable and still not be liquid?

Yes. Profit and liquidity are two entirely different metrics. A profitable company can still run temporarily short on cash—for instance, if clients pay late or too much capital is tied up in inventory. That is why tracking profitability must always go hand in hand with monitoring liquidity.

How often should a company calculate its liquidity?

Ideally, continuously. Relying solely on balance-sheet reporting dates is not enough for active management. Updating your liquidity at least weekly or using a tool with automated bank feeds allows you to identify leeway and bottlenecks early enough to take action. For corporations under German law, implementing an early warning system to detect developments threatening the company’s going concern is a statutory requirement anyway (§ 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