This calculator uses the following equation:
Ratio = Sales / Accounts Payable
These ratios help short term creditors determine a company's financial strength. If a company scores a high ratio, the more likely they are to pay off their debts in a given period. If a company score's a low ratio, they are less unlikely to pay off their debts in a given period.
Hot to interpret the Accounts Payable Ratio Calculator. A ratio under 1 means the business doesn't have enough sales to meet their Accounts Payable, or to meet their expenses. A ratio equal to or greater than 1 means that the business has enough sales to keep up with their expenses, or their Payables. The higher that number is above 1, the more profit a business makes.
What are accounts Payable?
Accounts Payable, in short as AP or Payables, is a function which contains accounting transactions which draw money away from the business. This most commonly includes payments and money owed to suppliers and vendors for goods and services provided to the business.
Under normal accounting practices, AP is classified as a liability and has a credit balance.
In simpler terms, Payables is an account used in order to organize bills which need to be paid.
For example, if a business has to pay rent and utilities, they would go in the Accounts Payable under separate transactions. Any marketing or advertisement bills they need to pay would also go under AP. Under normal accounting practices, whenever the business occur an expense with their vendors or suppliers they document those transactions under Accounts Payable.
Example 1:
Last month, MyTech Easy Software had sales of $180,000. They also had a balance of $38,000 in Accounts Payable for the month. President of Virtual Marketing Company wants to know their AP Ratio to better imagine their position in the future months that lay ahead.
We take Sales / Payables to get Accounts Payable Ratio
$180,000 / $38,000 = 4.74
AP Ratio = 4.74
Let's say the President of this company knows that in three months their sales will drop below $38,000 to give their AP Ratio less than 1.0 and the Accounts Payable will remain at $38,000. He knows that it is vital to the business to raise this ratio so it can sustain the business in its slow month(s).
Since this business may have unsteady periods of income, they may want to check out calculator < calc/business/0847.php> "Average Accounts Receivable."
Helpful Definitions: