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Cutting Through the Financial FogThis blog is part of the High-Performing Company Series(link to category), on Accounts Payable. To read Part II, click here.
Accounts payable plays a critical role in your company’s cash flow and overall financial health. Efficient management ensures you’re paying vendors on time—but not too early—and keeping cash in your business where it’s needed most.
By leveraging key financial ratios, you can uncover inefficiencies, improve liquidity, and make data-driven decisions that enhance cash flow.
In this two-part blog series, we’ll break down the four essential accounts payable ratios you need to know. Part I focuses on:
These ratios not only provide clarity on your cash flow cycle but also guide you toward becoming a high-performing company in accounts payable.
Cut Through the Financial Fog with a Comprehensive Business Wellness TestFour key financial ratios in Accounts Payable (AP) drive your company toward higher performance. These ratios are interconnected, meaning that improving one often positively impacts the others.
Each ratio provides insights into your company’s cash outflow, allowing you to improve both efficiency and liquidity. By leveraging these ratios, you can make actionable changes to increase cashflow and elevate your company’s financial performance.
Daily Payables Outstanding (DPO)DPO measures how many days, on average, it takes your company to pay its outstanding vendor debts within a specific period (e.g.,monthly, quarterly, or annually).
How many days on average, within a single period, does it take your business to pay its suppliers?
The timing of your vendor payments significantly impacts your company’s cash flow and liquidity. Balancing vendor terms with cash outflow is crucial for high performance. Paying vendors earlier than necessary may harm your liquidity, reduce efficiency, and provide no strategic benefit.
Efficient payables management ensures:
Efficient DPO management allows you to optimize cashflow, maintain liquidity, and contribute to your small to medium-sized business’ overall financial health.
Daily Payable to Daily Sales Outstanding (DPO-to-DSO)The DPO-to-DSO ratio examines the relationship between the number of days it takes to pay vendors (DPO) and the number of days it takes to collect receivables (DSO).
What is the ratio between how you company pays its debt and how your company collects its receivables?
This ratio offers a clear picture of how efficiently your company handles its cash flow cycle. For example:
Understanding and optimizing this ratio ensures your company operates efficiently and maintains a positive cash flow.
Understanding Cash Flows in Accounts Payable Your company’s cash flow improves when efficiency and liquidity are added to AP operations. However, standard AP automation tools often lack the depth to answer key questions such as:
Our financial ratios provide:
Next StepsImproving accounts payable processes is key to increasing cash flow and driving financial performance. Be sure to read Part II of this series to learn about the final two AP ratios: Accounts Payable to Sales (APS) and Accounts Payable Turnover (APT).
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