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 staying capable of acting and growing in a planned way.
• It is calculated using three liquidity ratios: Liquidity Ratio 1 (liquid assets only), Ratio 2 (additionally short-term receivables), and Ratio 3 (additionally inventory).
• The basic logic is always the same: you divide the available funds by the current 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%). The values vary depending on the source and industry.
• Liquidity is not the same as profit. A profitable company can stay solvent or run into a bottleneck, depending on when the money actually flows.
• Balance sheet ratios are a snapshot in time. For good decisions, supplement them with ongoing, forward-looking liquidity planning, for example with software like Tidely.

What is liquidity?

Liquidity is your company's ability to meet due payments on time at any moment. 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 capable of acting your company is.

The time perspective is decisive. A full order book is valuable but doesn't help if the customer payment only arrives in 60 days and salaries are due next week. Liquidity therefore answers a very concrete 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 cushion can buy at favorable terms, take early-payment discounts, invest in growth, and negotiate from a position of strength.

How to calculate liquidity?

You calculate liquidity by comparing short-term available funds with short-term liabilities. Since not every asset can be converted into cash at the same speed, business administration uses three tiered key figures for this purpose, known as liquidity ratios.

So there isn't just one liquidity formula, but three levels that build upon 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 inventories in relation to short-term liabilities.

The logic behind this is simple: The higher the degree, the more assets are included, and the higher the value usually turns out to be. The lower the degree, the stricter and more conservative the key figure.

These three key figures are internationally known as the cash ratio (Liquidity Ratio 1), the quick ratio (Liquidity Ratio 2), and the current ratio (Liquidity Ratio 3). The Gabler Wirtschaftslexikon defines them in the same way.

The chart shows how the three liquidity ratios build on one another. Each bar cumulatively adds the assets that flow into the respective ratio: Ratio 1 includes only the liquid assets (€50,000), Ratio 2 additionally the short-term receivables (€90,000), and Ratio 3 additionally the inventory (€120,000). The red line represents the current liabilities (€80,000), that is, what has to be paid in the short term.

If a bar extends past the red line, the liabilities are covered. For Ratio 1 the bar stays below the line, while from Ratio 2 onward solvency is mathematically ensured.

In short: Calculating liquidity involves comparing available and quickly convertible assets with short-term liabilities. The three liquidity ratios provide three perspectives on your solvency: from a strict focus on bank balances (1st degree) to a comprehensive view that includes inventories (3rd degree).

Calculating 1st Degree Liquidity: Formula and Example

1st Degree Liquidity (Cash Liquidity, Cash Ratio) shows what proportion of your short-term liabilities you can cover immediately with liquid assets. It is the strictest of the three ratios because it only considers immediately available cash.

Formula:

1st Degree Liquidity = liquid assets ÷ short-term liabilities × 100

Liquid assets include cash, bank balances, and very short-term liquid funds like checks. Receivables and inventories are deliberately not included here.

Example: Your company has 50,000 Euros in its business account. Short-term liabilities amount to 80,000 Euros.

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

Interpretation: You could immediately pay 62.5% of your short-term liabilities from your own cash reserves. 

Important for context: A healthy 1st Degree Liquidity is usually considered to be a value of 20 to 30 % (depending on the industry, up to about 50%). At 62.5%, you are above this. This is not a risk to solvency, but it suggests that a relatively large amount of money is lying idle in the account that you could invest or put into an interest-bearing deposit.

Calculating 2nd Degree Liquidity: Formula and Example

2nd Degree Liquidity (receivables-based liquidity, Quick Ratio) additionally considers short-term receivables, i.e., amounts that your customers are expected to pay shortly. For many companies, it is the most practical key figure because it reflects not only today's account balance but also realistically incoming payments.

Formula:

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

Example: In addition to the €50,000 in cash and cash equivalents, there are €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 can likely fully cover its short-term liabilities, provided customers pay on time. This is precisely where the practical leverage lies: receivables are only liquid if they are actually received on schedule.

Calculating the Current Ratio: Formula and Example

The Current Ratio (Liquidity Ratio of the 3rd Degree) also includes inventories, providing the most comprehensive view of short-term solvency. Inventories include, for example, raw materials, auxiliary materials, and operating supplies, work in progress and finished goods, as well as advance payments made.

Formula:

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

Example: In addition to the €50,000 in cash and cash equivalents and €40,000 in receivables, your company holds inventories worth €30,000. Short-term 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; 150 to 200% (1.5 to 2.0) is ideal, but only if the inventory can actually be sold quickly.

Because inventory cannot be immediately converted into cash, the third degree of liquidity is less indicative for short-term decisions than the first and second degrees.

Good to know: At Tidely, we deliberately focus on the first and second degrees of liquidity because they reflect the cash flows you can directly work with in your day-to-day business.

Exercise: Calculating Liquidity of the 1st, 2nd, and 3rd Degrees with an Example

You'll best understand the three degrees of liquidity if you calculate them together using the same figures. For this, we'll use the values from the examples above and present the results side-by-side.

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What does the example tell us above all?
That you should read the three ratios together. The company is solvent: Liquidity Ratio 2 (112.5%) and Ratio 3 (150%) are in the healthy range. Ratio 1, at 62.5%, is above the benchmark of 20 to 30%. That is not a risk to solvency, but a sign that a lot of money is sitting unused in the account, money you could invest or place at interest.

Calculating liquidity from the balance sheet

To calculate liquidity, you take the necessary figures from the current assets and current liabilities on your balance sheet. The structure follows the layout of current assets under § 266 of the German Commercial Code (HGB). This is how you map the balance sheet items to the three liquidity ratios:

• Liquid assets: cash on hand, bank balances, and cheques from current assets.
• Short-term receivables: mainly trade receivables with a remaining term of up to one year.
• Inventory: raw materials, consumables and supplies, work in progress and finished goods, and merchandise.
• Current liabilities: trade payables, short-term bank liabilities, and other liabilities with a remaining term of under one year.

You will find these items in two places on the balance sheet. On the assets side, under current assets, are the liquid assets, the receivables, and the inventory. On the liabilities side are the payables, of which you only consider the short-term ones with a remaining term of up to one year. From these values you assemble the respective formula.

A short example: if your balance sheet shows €50,000 in liquid assets, €40,000 in receivables, and €30,000 in inventory under current assets, with €80,000 in current liabilities against them, you have exactly the figures you need to calculate Liquidity Ratios 1, 2, and 3. You can find the numbers in the annual financial statements or, during the year, in the trial balance or the business analysis (BWA) from your accounting.

The balance sheet is well suited for determining the liquidity ratios in a structured and transparent way. But 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 already weeks or months in the past. It does not tell you how your liquidity will develop in the coming weeks. More on that later.

Calculate Free Liquidity

Free liquidity shows how much money is actually at your free disposal after deducting all due short-term payments. It is less a classic balance sheet ratio than a practical management figure for everyday use.

Unlike the liquidity ratios, which express a relationship as a percentage, free liquidity is a concrete euro amount. It does not tell you how good your key figures look, but how much money you could actually deploy today without jeopardizing a due payment.

A simple approximation is:

Free liquidity = available liquid assets + open credit lines − due short-term liabilities

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

Free liquidity therefore answers the question that really interests you in day-to-day business: how much room do I have right now to invest, build up inventory, or make a special repayment without jeopardizing my solvency?

Important: only count credit lines that are actually available, and do not include money that is already committed, for example for upcoming taxes or wages. And because your account balance and your liabilities change daily, free liquidity is not a one-off calculation. It is most meaningful when you track it continuously.

Calculate Liquidity with Excel

Excel is a good starting point for calculating and monitoring your liquidity. With a structured template, you can quickly capture the most important key figures and determine if your company is financially sound.

For this, download our free Excel template for liquidity planning and enter your values. This gives you a solid basis for regular analyses.

However, Excel quickly reaches its limits as your company grows: it doesn't provide automatic bank connectivity, real-time data, and is prone to errors with manual input. If you want to manage your liquidity efficiently and proactively, specialized software is the next logical step. 

Tools like Tidely automatically synchronize account data and reduce weekly time spent by an average of 51%, which is approximately 4 hours (Tidely User Survey). 

Recommended Reading: The Top 10 Liquidity Planning Tools: 2026 Comparison

Interpreting liquidity correctly: which values are healthy?

Healthy liquidity depends heavily on your industry and business model. As a guideline, around 20 to 30% applies to Ratio 1, 100 to 120% to Ratio 2, and at least 120% (ideally 150 to 200%) to Ratio 3. These values vary depending on the source and industry. These benchmarks are not a rigid law but a corridor in which most healthy companies operate. More important than hitting an exact number is understanding what your value says about your solvency. Here is how to read your figures:

• Values above 100% (except Ratio 1): your company can safely cover its current liabilities, which is a good sign. Very high values, especially for Liquidity Ratio 1, are not automatically better, though. They can indicate that a lot of money is sitting unused in your account, money you could invest, put toward growth, or place at interest. Liquidity means security, but too much of it costs return.
• Values below the benchmark: a signal to take a closer look, but not yet a reason to panic. Often a few targeted measures are enough to counteract it: collect open receivables faster, spread out larger expenses, reduce inventory, or build up liquid assets deliberately. What matters is that you spot a low value early, not only when a payment is already due.
• Read the ratios together: a single key figure never tells the whole story. Always look at Liquidity Ratio 1 and 2 together, because only in combination can you see whether a low cash balance is offset by receivables that will reliably come in. Ratio 3 rounds out the picture with inventory, but it is less meaningful for short-term decisions because inventory can rarely be turned into cash immediately.

Two things ultimately matter more for interpretation than the absolute value.

First, the industry: in retail and e-commerce, a lot of capital is tied up in inventory, so Ratio 3 is naturally higher, while Ratio 1 is often lower because the money is in the goods. In hospitality and retail, daily cash takings ensure a comparatively stable cash balance, but seasonal swings weigh on the figures. For service providers and agencies, there is hardly any inventory, so Ratios 2 and 3 are close together, and everything depends on customers paying on time. A value that is perfectly normal in one industry can already be a warning sign in another.

Second, the trend: a single reporting-date value is a snapshot that can be deceptive. The development over several months is more meaningful. If your liquidity stays stable or rises slightly, that is a good sign, even if the absolute value is not perfectly within the corridor. If it falls continuously over several periods, you should act, even if the current value is still in the green. So always compare your liquidity with the previous period and with your industry, not just with 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 money, not to a lack of revenue. This is exactly what makes liquidity ratios so tricky: a company can be busy and profitable and still report values that are too low, because the money has been earned but is not yet in the account. The most common causes of a deviation are:

• Late customer payments: open receivables do not turn into cash in time. The longer your customers take, the more liquidity is tied up in unpaid invoices, even though the revenue was earned long ago.
• High inventory levels: capital is tied up in stock that sells only slowly. Every unsold item is money you have already spent but cannot access in the short term.
• High current liabilities: for example, when long-term purchases were financed on a short-term basis. A machine with a ten-year service life is then matched against a loan that is already due in two years, unnecessarily burdening short-term liquidity.
• Unexpected expenses: repairs, back taxes, or a defaulting customer quickly eat into liquid assets and hit especially hard when they coincide with other burdens.
• Missing credit lines: without a buffer, every fluctuation feeds straight through to liquidity. An unused overdraft facility, by contrast, acts like an airbag for unexpected expenses.
• Seasonal fluctuations: income and expenses fall at different times. In low-revenue months, fixed costs continue while income only follows later.
• Rapid growth: those who grow fast often have to pay for materials, staff, and inputs before the revenue comes in. Paradoxically, liquidity becomes tighter during growth phases, not more abundant, an effect many underestimate.

It is important to distinguish temporary deviations from structural ones. You bridge a seasonal dip or a one-off back tax payment with a buffer or a credit line. But if the cause lies in the business model itself, such as permanently overlong payment terms or chronically high inventory, no short-term stopgap will help. Then you have to go to the root and fundamentally adjust processes, terms, and planning.

How can you strengthen your liquidity in a targeted way?

If your liquidity is outside the desired range, there are several effective levers. They work at different points: on the income side, the expense side, and in financing:

• Collect receivables faster: agree on shorter payment terms, issue invoices immediately after delivery, and set up a consistent dunning process. Every day an invoice is paid earlier is liquidity available to you sooner.
• Negotiate payment terms on the expense side: longer terms with suppliers create room, the counterpart to faster collection of receivables. Acting on both sides widens the gap between cash in and cash out.
• Optimize costs: review fixed costs regularly, renegotiate terms with suppliers, and question subscriptions and contracts that are barely used. Even small, lasting savings improve liquidity month after month.
• Keep inventory lean: free up capital tied in stock by aligning inventory with actual demand. Less dead capital in the warehouse means more available cash.
• Manage working capital: look at receivables, inventory, and liabilities together, because it is precisely in this interplay that capital is tied up. Those who actively manage working capital often free up more liquidity than through any single measure.
• Use financing scope: overdraft facilities or factoring provide short-term breathing room, for example to bridge a seasonal dip or a growth phase.
• Plan ahead: monitor your liquidity continuously to spot room to maneuver early and avoid liquidity bottlenecks before they arise. Those who know their cash flows act from a position of strength rather than out of necessity.

Important: not all levers work the same way. Factoring or selling unused assets create breathing room quickly but do not solve the cause, they buy you time. What works sustainably are better processes: prompt invoicing, clear payment terms, and ongoing planning that makes bottlenecks visible early. The most powerful approach is the combination of both, creating short-term room while addressing the structural cause at the same time.

Why liquidity is not the same as profit

Profit and liquidity are two different things: profit shows what was earned after deducting all costs, liquidity shows how much money is available right now. The two can diverge, and the reason lies in accounting itself.

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

An example: in January you issue invoices totaling €100,000 and are highly profitable on paper. But if your customers only pay in 60 days while salaries, rent, and taxes are already due now, your account can be empty even though the P&L shows a profit. In Germany, 45% of all B2B invoices are paid late (Intrum, 2024), and exactly these delays open up the gap.

The reverse case is also possible: a company can post losses and still remain solvent, for example because a loan or an advance payment brings in fresh money. Both show the same thing: profit alone says nothing about solvency. That is why it pays to keep an eye on liquidity alongside the profit figures.

The good news: those who know their cash flows can take targeted countermeasures long before a late payment becomes a problem.

From practice: the most critical phases are rarely the low-revenue months. They are the weeks in which large expenses such as advance tax payments or annual insurance premiums coincide with delayed customer payments. A forward-looking view of liquidity makes exactly these overlaps visible early.

The limitations of traditional liquidity metrics

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

• Reporting-date effect: the values can be influenced deliberately. Anyone who settles open liabilities or postpones payments shortly before the reporting date improves the ratio on paper without anything changing in the actual situation.
• Quality of receivables: Ratio 2 assumes that all receivables will come in on time. If there is a late-paying or insolvent customer among them, the figure is too optimistic. The sheer amount of receivables says nothing about how recoverable they are.
• Assumption of saleability: Ratio 3 counts inventory in full, as if it could be turned into cash at any time. In practice, however, some stock is hard to sell or only sellable at a discount.

What the static ratios also fail to capture are the decisive dynamic factors: outstanding payments, newly arising 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 considering: Good equity alone does not replace liquidity planning. The average equity ratio in SMEs in Geermany is 30.7% (KfW, 2025), but equity is on the balance sheet, not in the bank account. This is exactly where a dynamic view comes in, as the next section shows.

Dynamically calculate and plan liquidity with Tidely

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

This is how you continuously calculate and plan your liquidity, not just retrospectively:

• AI-powered onboarding and forecasting in 15 minutes: Tidely synchronizes your transactions, the AI automatically sorts them against a clean category tree, recognizes 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 a few clicks.
• Dashboard with Real-time KPIs: up-to-date overview of your entire financial position.
• Flexible Time Views and Reporting: from the 21-day view and 13-week planning to the strategic annual overview, including PDF and Excel reports at the push of a button.

Tidely also offers a new direct DATEV integration. With it, your accounting data flows automatically into Tidely, without you having to transfer documents or reports manually. Especially if your accounting runs through DATEV or your tax advisor works with it, you avoid duplicate data entry: the data from your financial accounting is available directly in your liquidity planning.

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

The industry standard demonstrates the reliability of forward-looking planning: In the first four weeks, a rolling 13-week forecast achieves over 95% forecast accuracy (GTreasury, 2025). In Tidely, you can now create it with a single click.

‍Frequently Asked Questions about Liquidity Calculation

How is liquidity calculated?

You calculate liquidity using the three liquidity ratios. You divide available funds by short-term liabilities and multiply by 100. The 1st ratio uses only liquid assets, the 2nd ratio additionally includes short-term receivables, and the 3rd ratio additionally includes inventory.

How do I calculate Liquidity Ratio 1?

Liquidity Ratio 1 = liquid assets ÷ short-term liabilities × 100. Example: 50,000 Euros in liquid assets divided by 80,000 Euros in liabilities equals 62.5%. The healthy benchmark is around 20 to 30%.

How do I calculate Liquidity Ratio 2?

Liquidity Ratio 2 = (liquid assets + short-term receivables) ÷ short-term liabilities × 100. This key figure, also known as the quick ratio, is considered healthy at 100 to 120% because liabilities are then covered by cash and short-term expected receivables.

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

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

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

The three degrees differ in which assets are included. The 1st degree only includes cash and cash equivalents, the 2nd degree additionally includes short-term receivables, and the 3rd degree additionally includes inventories. With each degree, the value increases, but at the same time, the certainty that the funds are immediately available decreases.

How is liquidity calculated from the balance sheet?

You take cash and cash equivalents, receivables, and inventories from current assets and compare them to short-term liabilities. The balance sheet provides a clear structure for this but only shows a snapshot in time. For ongoing management, you 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 insufficient cash in its account, for example, if customers pay late or capital is tied up in inventory. Therefore, an assessment of profitability should always include a look at liquidity.

How often should a company calculate its liquidity?

Ideally, continuously. A mere snapshot from the balance sheet is insufficient for management. Companies that 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 for detecting developments that threaten their existence is legally mandated anyway (§ 1 StaRUG).

Sources

• German Commercial Code: § 266 Structure of the Balance Sheet
• Gabler Business Dictionary: Liquidity Ratios 
• StaRUG: Section 1 Crisis Early Warning and Crisis Management
• KfW: SME Panel 2025
• Intrum: European Payment Report, 2024
• GTreasury: 13-Week Cash Flow Forecasting, 2025

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