Are You Ignoring Hotel Quick Ratio?
Have You been Giving Attention to Your Hotel Quick Ratio?
Why is that, you ask?
The Hotel Quick Ratio is one of the Early Warning Signal Ratios!
What? Yes, it is serious stuff.
See Infographic below to understand why the hotel quick ratio is so critical.
Hotel Quick Ratio is also known as Acid Test Ratio.
Liquidity Ratios
Hotel Quick or Acid Test Ratio
What is Hotel Quick Ratio?
The Hotel Quick Ratio is actually a revised form of the more common Current Ratio.
You could say that Quick Ratio is a better indicator than the current ratio.
Let’s see why and how.
Current Ratio is simply the ratio of Current Assets to Current Liabilities.
The formula is:
Current Assets / Current Liabilities
Quick recap of what current assets and current liabilities are:
Assets used up within a financial year are current assets.
Liabilities payable within a financial year are current liabilities.
Take a look at the Current Assets and Current Liabilities of Paradise Hotel below:
How is Hotel Quick Ratio Useful?
In many cases, the Hotel Quick Ratio or Acid Test Ratio is below 1.0.
That is not a good situation to be in.
You are getting an early warning from this ratio.
Liquidity is one of the key measures of short term solvency.
In other words, the ability to pay current liabilities with current assets.
Is the hotel able to cover its short term liabilities with its short term assets?
Or, how liquid are the hotel’s current assets?
If current liabilities are not covered by current assets less inventories, the hotel will have a cash crunch.
This is because inventories are not sold yet.
So, they are not able to provide the cash necessary to pay liabilities.
This is the reason the Hotel Quick Ratio is so critical.
How to Read Hotel Quick Ratio
A Current Ratio must always be verified with the Hotel's Quick Ratio.
See screenshot of Current Assets of Paradise Hotel below.
Paradise Hotel Balance Sheet - Current Assets
In other words, calculate the current ratio but check with the Quick Ratio.
This is to ensure that inventories are not skewing the liquidity.
Hotel Quick Ratio below 1.0 is a warning that current assets are not very liquid.
They may not be able to pay the current liabilities.
The Full Monty
Want to have a complete picture of Hotel Financial Ratios?
Click for the Ultimate Guide on Hotel Financial Ratios - Financial Health.
Did you like this Speed Tip on the Hotel Quick Ratio?
What are Speed Tips, you ask?
Great Question.
Learn all about it below.
SPEED Tips - Learn in Minutes!
SPEED Tips - Learn in Minutes!
SPEED Tips - Learn in Minutes is a series that brings basic concepts and tips to assist beginner hotel managers.
You will get byte sized concepts explained to you in simple, non-technical language.
The philosophy behind SPEED Tips is to:
- quickly and
- briefly explain
- a fundamental concept
- often supported by visual elements like a :
- video,
- infographic,
- screenshot,
- slideshow and so on.
You will end up learning in minutes!
The fundamental concept may be about hotel:
- financial statements
- evaluating financial performance
- revenue management
- leadership
- productivity and so on
Want to stay updated on all SPEED Tips?
Sign Up for SPEED Tips - Learn in Minutes Newsletter for quick tips, strategies, secrets straight to your InBox!
SPEED Tips You May Have Missed
Here, you will be able to access other SPEED Tips in the series that you may have missed.
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