Is a current ratio below one a problem for a restaurant?
What a current ratio below one means for a restaurant or hotel, why a business paid in cash can run there safely, and the signs that it cannot.
By Achekam · · 5 min read · For Hospitality businesses in South Africa, Nigeria, Kenya
The management accounts arrive with a note from your accountant: "Current ratio below 1. Worth a chat." For a restaurant owner who has just had a strong month, that is puzzling. The tables were full, the suppliers are being paid, and the bank balance looks healthy. So what is the ratio trying to say?
It depends on how your business collects money and how it pays it out, and on which way the ratio is moving. A reading below one can be the normal shape of a hospitality business, or the first sign that it is spending money it owes to someone else. The owner's job is to tell which.
The ratio in one line
The current ratio is current assets divided by current liabilities. ACCA defines working capital as current assets less current liabilities, the net current assets available for day-to-day operating activities. The ratio makes the same comparison as a proportion rather than an amount. Below one, current liabilities are larger than current assets; Investopedia calls that negative working capital.
"Current" has a precise meaning. Investopedia explains that it covers a period of one year or less: current assets can be converted into cash within 12 months, and current liabilities must be paid within the same period.
In a restaurant or hotel, current assets are usually cash in the bank and the tills, card and mobile-money settlements still on their way, food and drink in stock, money owed by corporate or event customers, and expenses paid in advance. Current liabilities are usually supplier accounts, VAT and payroll taxes owed, wages accrued, deposits received for future bookings and functions, and any overdraft or short-term loan.
Why a business paid in cash can sit below one
ACCA explains that a current ratio below 1 may indicate problems meeting obligations, but the industry average has to be taken into account: in sectors such as supermarket retail, a ratio below 1 can be acceptable.
The reason lies in how the money moves. A supermarket is paid at the till, sells its stock quickly, and pays its suppliers on credit. It carries few receivables and modest stock, while owing suppliers for goods it has already sold. Many restaurants share that pattern. Diners pay before they leave, fresh produce turns over within days, and the butcher and the beverage wholesaler are paid at month end. A venue that takes deposits for future weddings adds another liability: money received for a service it has not yet delivered.
None of that is trouble in itself. It is the shape of a business that collects first and pays later.
When the reading is a warning
Investopedia describes negative working capital as a warning sign of more short-term debt than short-term resources, while noting that a short period of it may not be a problem, depending on the business's stage of life. Treat a low ratio as a real warning when:
- it falls month after month, not only in the quiet season;
- supplier balances are getting older, or suppliers have started asking for cash on delivery;
- VAT or payroll taxes are being paid late to keep cash in the bank;
- the overdraft is paying wages rather than bridging a gap you can name;
- deposits for future functions have been spent on running costs.
That last sign deserves particular care in hospitality. Event deposits sit in current liabilities because the business owes the event. If the cash behind them has gone, a ratio below one is exactly the problem it appears to be.
Reading the figures from your own balance sheet
In Achekam, the management accounts include a balance sheet at period end, added up from the business's own journals and exportable as PDF or CSV. Take total current assets and total current liabilities from it, and divide the first by the second.
Before you trust the answer, make sure the balance sheet is complete. The trial balance shows each account at a date and says whether debits equal credits, and the general ledger lists every posted line behind each balance. A supplier bill left unrecorded understates liabilities; a stock figure that was never updated after the count can push the ratio either way. Either one can move the reading across the line by itself, so check the obvious gaps before drawing conclusions:
- every supplier invoice for the month recorded;
- VAT and payroll liabilities posted for the period;
- deposits for future events sitting in a liability account, not in sales;
- the overdraft shown as a liability rather than as a negative bank balance hidden among the assets.
Following the ratio through the season
One reading at one date says little. Export the balance sheet at each month end and keep a running note: the date, the ratio, and a line on what moved it, such as "festive deposits received", "annual insurance paid" or "loan instalments now due within the year". After a full year you will know your own seasonal pattern, and a reading outside it stands out at once.
The income statement in the management accounts sits beside the period before, which helps you link a falling ratio to a weak month of trading. One detail: the year-to-date preset starts on 1 January, not on your own year start, so set the dates yourself if your financial year begins in another month.
For the quiet months themselves, cash planning for the low season works through a plan, and when cash really is short, deciding which supplier bills to pay first helps you keep the suppliers you cannot do without. ACCA's technical article on working capital management explains the current ratio, its industry context and the trade-offs between cash and credit in more depth.
Next time the ratio dips below one, ask two questions before you worry. Is this my usual seasonal shape? And is the cash behind my deposits and tax liabilities still there? If both answers are yes, it is a figure to watch rather than a crisis.
General guidance only, not advice on your own circumstances. Tax and payroll rules change: check the current position with the authority or your adviser.
