![]() ![]() But instead of using your net credit purchases, you calculate it using your total cost of goods sold (COGS). The AP/COGs ratio is another way of calculating your AP turnover ratio. Your ratio will be affected by your supplier relationships and payment agreements ― if you’ve arranged to pay a certain supplier every 30 days, that will be reflected in your turnover ratio but isn’t necessarily a sign there’s anything wrong. Conversely, a decreasing ratio means there are longer intervals between supplier payments, and could be a sign of cash flow issues.Īgain, it’s not an exact science. An increasing ratio means you’re paying off your suppliers more frequently/quickly than in previous periods ― a sign that you’re managing your cash flow effectively, and potentially taking advantage of early payment discounts. It’s less about aiming for a 'good' AP turnover ratio than tracking how your ratio changes from period to period. The AP turnover ratio is a performance metric. You can calculate this ratio by dividing your net credit purchases by your average AP for the same period ― giving you the number of times your accounts 'turned over'. The AP turnover ratio measures how many times your company can pay off its suppliers or creditors over a given accounting period. What is the AP turnover ratio?ĪP Turnover Ratio = Net Credit Purchases / Average AP in the Same Period While this can be a strategic decision, it can also indicate that the company isn’t using its own resources effectively, and might have difficulty settling its accounts payable. It means your company has more of its current assets available to cover other short-term obligations.īy contrast, a current ratio of less than 1.5 can suggest your company is relying more on trade credit from suppliers to finance its operations. You can calculate this ratio by dividing the total of your current assets by your liabilities, including your AP.Ī ratio greater than 1.5 suggests your company relies less on its suppliers for short-term financing, which potentially indicates a stronger liquidity position and better financial management. Again, a 'good' ratio is dependent on various factors, including your industry, business model, and financial strategy ― but a ratio of between 1.5 and 2 is generally considered sufficient to cover your liabilities with enough room to spare. Th current ratio assesses a company’s ability to cover its liabilities (including accounts payable) with its current assets. What is the current ratio?Ĭurrent Ratio = Current Assets / (Liabilities + AP) Property management companies, for example, should expect a much smaller ratio. Some industries, like retail, might expect to have a higher AR/AP ratio ― you’re probably selling a lot of products, and you’re unlikely to work with too many external vendors. ![]() ![]() However, it's important to consider your industry and specific business circumstances. A ratio closer to 2:1 in favor of AR indicates a healthy business, but closer to 3:1 in favor might suggest you ought to look at growing your business, or investing that money in acquisitions or other areas. But here’s a general rule of thumb:ĪP > AR: You don’t want your accounts payable to exceed your accounts receivable, because that probably means you’re paying out more than you’re taking in.ĪR > AP: You’ll want to see a ratio greater than 1:1, as that doesn’t give you much wiggle room. There’s no universally ‘good’ or ‘bad’ AR/AP ratio, as it varies depending on the industry, the company's specific circumstances, and its financial goals. To calculate this ratio, divide your monthly AR by your monthly AP. The AR (accounts receivable) to AP ratio measures a company's liquidity, and ability to manage its short-term financial obligations. Let’s take a look at some of the more common financial KPIs, and where accounts payable (AP) fits in. We call these metrics key performance indicators, or KPIs. There are many ways to measure the financial health of an organization, and the effectiveness of your finance department. How accounts payable relates to your financial KPIs. ![]()
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