You want your company’s overall profile to look good for any potential suitors. And by “suitors,” I mean creditors and those who would potentially loan your company cash.
There are a lot of good reasons to make sure you are always top of the list for any loan potentials. If you want to build out a new infrastructure for your company, your accounts payable turnover ratio is going to be crucial to those lenders.
Why are the Accounts Payable ratios important?
They want to make sure you pay your bills on time. They want to ensure you don’t overspend or over project your cash flow situations. Your ability to manage money is ultra important when it comes to lenders trusting your business to make them money or only pay them back. It is a vital measure of a productive workforce.
How do you calculate your accounts payable turnover ratio? Investing Answers has a wonderful, easy to follow formula listed.
Let’s assume Company XYZ buys $10 million of widget parts this year. Of those purchases, $8 million was on credit, meaning that it did not pay immediately for the widgets it bought. Company XYZ usually carries an average of $400,000 in accounts payable on its balance sheet. Payables are liabilities, and as such, they appear on the balance sheet. In particular, accounts payable are current liabilities, meaning the amount owed is expected to be paid within the next 12 months.
Using this information and the formula above, we can calculate that Company XYZ’s accounts payable turnover ratio is:
Payables Turnover Ratio = $8,000,000/$400,000 = 20
By dividing 365 days by the ratio, we find that Company XYZ takes about 18 days to turn over its accounts payable.
This is the formula that will tell a creditor or potential lender how well you pay your bills. If the number is too low, it may appear that the company doesn’t always pay its bills and debts on time. Too high and well, it might look like your business overspends.
But hey, don’t stress too much. It is never too late to learn these best practices and improve your company’s investing profile.
Accounts Payable, Where Inefficiencies Can Cost Your Company
If you strive to have the best business you can, and we assume you do because why else would you have a business, then you want to be efficient in every aspect of your business. And your focus shouldn’t end when it comes to your accounts payable department, but for so many firms, this is the reality.
Properly train your staff. When your staff has trouble with software or utilizing specific aspects of a computer, they simply move slower. When it comes to accounts payable, software and computers are going to be a large part of their detail. Check Issuing is one of the top accounts payable third-party software and though we are easy to use, it still requires a basic level of computer skills. Often, accounts payable staff were once in more old settings. Some businesses never evolved that department. You also want to make sure that the equipment and software you do use isn’t bogging down the department.
Accounts Payable is just as much about the risk prevention as it is about check writing. It is often assumed that this department has the simple function of just dispersing checks, but the truth is, the department has a much more complex function than that. Fraud and risk prevention should be at the very core of any accounts payable functions. Check fraud remains big business for the criminally minded. A core competency of fraud prevention is best served by using someone like us (ap outsourcing companies ), but if you do choose to do it on your own, remember that proper training is everything.
Compliance is a big deal when it comes to accounts payable. The IRS often loves to hassle the company who pays out the clients because, well, that’s where the bulk of the cash can be tracked; and the IRS is interested in the most bang for their buck. So making sure that your bookkeeping on outgoing checks is straight is essential.
Make sure your staff is good at client services. When you write checks to people, people are going to have questions. Accounting departments receive a lot of inquiries due to people wanting to find out where payments are, confirm payment amounts and ask about payment methods. You want to make sure that the staff responsible for answering these inquiries is a solid communicator who understands that they are representing the business. Use these interview questions when hiring for your accounts payable department.
The point is, accounts payable should be treated as an expansive, comprehensive part of your business. Mistaking it for a small, inconsequential, simply part of the business can set you up for all kinds of issues if you aren’t careful. Instead let us, one of the top third-party accounts payable companies, manage your payroll checks printing and mailing.
