Accounts Payable: Part II

Optimizing for Financial Success

This blog is part of the High-Performing Company Series, on Accounts Payable. To read Part I, click here.

Efficient management of accounts payable (AP) is critical for maintaining liquidity and increasing cash flow. It’s not just about paying bills—it’s about leveraging key financial ratios to identify inefficiencies, improve short-term liquidity, and optimize cash flow.

In this two-part series, we’re diving into the four essential AP ratios that can help your business achieve high performance:

• Part I, which you can read here, introduced Daily Payables Outstanding (DPO) and Daily Payable to Sales Outstanding (DPO-to-DSO).
• Part II focuses on Accounts Payable to Sales (APS) and Accounts Payable Turnover (APT).

These ratios work together to provide a comprehensive picture of your AP operations, driving improvements in both efficiency and liquidity.

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Accounts Payable to Sales (APS)

What is it?‍

The Accounts Payable to Sales (APS) ratio measures the proportion of your sales financed by suppliers. As a liquidity ratio, it offers insight into how effectively your company leverages supplier credit as a form of financing.

What question does it answer?‍

What percentage of your debts are in relation to your net sales revenue, within a single period?

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How to interpret it:‍

• A higher APS ratio indicates that your business relies more on supplier credit, which can be a low-cost way to finance operations.
• A ratio between 10-15% is generally considered excellent, but the "optimal" APS ratio depends on your unique circumstances, business objectives, and financial position.

Why it matters:‍

As a small to medium-sized business, balancing your APS ratio is crucial. While relying too heavily on supplier credit may create risks, underutilizing it could mean missed investment opportunities. Financial technology software specializing in ratio analysis and liquidity management can help you determine the right APS ratio for your business.

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‍Accounts Payable Turnover (APT)

What is it?‍

The Accounts Payable Turnover (APT) ratio measures how often your business pays off its average accounts payable balance within a given period. As a short-term liquidity metric, APT reflects your ability to settle debts promptly while maintaining healthy cash flow.

What question does it answer?‍

How many times a year or quarter,  does your company pay its entire average accounts payable?

What does it indicate?

• A ratio of 8 to 12 times per year is considered optimal for most small to medium-sized businesses, indicating robust financial health.
• Higher turnover ratios suggest your company is efficiently managing its cash flow and leveraging supplier relationships effectively.

Why it matters:‍

A strong APT ratio shows that your business is:

• Paying off debts promptly, which improves relationships with suppliers.
• Positioned to negotiate better terms, such as discounts or extended credit.
• Optimizing cash flow for operational and investment needs.

If your current APT ratio falls short of this range, identifying and addressing inefficiencies can significantly improve your financial performance.

Understanding Cash  Flow in Accounts Payable

Your company’s cash flow improves when efficiency and liquidity are added to AP operations. However, even with automation, there are critical questions that require deeper analysis:

• “What is the relationship betweenAP and sales, and how does it provide low-cost financing?”
• “How many times a year or quarter does your company turn over its average AP balance?”

How BizWell’s Ratio Score Software Helps‍

Our financial ratio analysis software can:

• Provide actionable insights intothese key metrics.
• Generate a Comprehensive Wellness Test Report with a detailed to-do list for improving liquidity.
• Enable substantive increases in cash flow by addressing inefficiencies in AP operations.

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Next Steps

Optimizing accounts payable processes is key to maintaining liquidity and driving cash flow improvements. By leveraging financial ratios like APS and APT, you can make data-driven decisions to achieve high performance.

Be sure to revisit Part I of this series if you haven’t already, and check out our other High-Performing Company blogs to learn more about financial ratio analysis.

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