These ratios indicate whether the franchisor will be able to meet maturing obligations or debts as they come due. The liquidity ratios include both current and quick ratios.

Current Ratio The current ratio measures the franchise's solvency by indicating (from current assets and current liabilities) the ability to pay current debts. The current ratio is calculated in the following manner:

Current ratio = current assets / current liabilities

This current ratio is also referred to at times as the working capital ratio and is the most commonly used measure of short term liquidity. Many financial experts argue for a franchise to maintain a current ratio of at least 2:1 (i.e., $2 of current assets to $1 of current liabilities) which maintains a comfortable cushion of working capital. Franchisors beware: some banks may require franchise headquarter's organizations to maintain this 2:1 ratio. This is high for a beginning franchise operation and requires a strong financial position which is generally not possible during the initial years of operation.

Quick Ratio. This ratio is often called the "acid test" ratio and is a more conservative measure of a firm's liquidity position. The quick ratio is calculated as follows:

Quick ratio = quick assets / current liabilities

Quick assets include cash and accounts receivable and any assets which may be converted into cash immediately. Inventory is not included as part of quick assets. A quick ratio of 1:1 is considered satisfactory. Anything less than that indicates that the franchisor may be dependent on inventory or has excessive liabilities.