Our corporate office is comparing our AP balances to sales numbers. Why are they comparing the two? Am I am missing a key metric for AP?


This metric is sometimes used for forecasting purposes or as a finance measure regarding a company's cash flow and/or working capital efficiency. There may be some application to operational efficiency but we are not familiar with using it for that purpose.

For instance, if your company is growing and generating good growth in cash flow then your company may be able to keep their A/P balance at a lower level than the expected growth rate with all other variables staying the same. So if there is a trend where this percentage is going down then it could point to this result. Example:

Year 1 sales = $10,000
Year 1 expense = $9,000
Year 1 profit = $1,000
Profit % = 10%
A/P balance = $1,000
A/P as % of sales = 10% ($1,000 / $10,000)

Year 2 sales = $15,000
Year 2 expenses = $13,500
Year 2 profit = $1,500
Profit % = 10%
A/P balance = $1,100
A/P as % of sales = 7.3% ($1,100 / $15,000)

Year 3 sales = $20,000
Year 3 expenses = $18,000
Year 3 profit = $2,000
Profit % = 10%
A/P balance = $1,300
A/P as % of sales = 6.5% ($1,300 / $20,000)

In the above example your absolute A/P balance dollars increased but as a percentage of sales it declined. This means your company was able to generate cash flow significant enough to have your A/P balance not grow as fast as your sales and expenses (if it grew at the same rate then the A/P balance in Year 2 would have been around $1,500). The cash flow was either generated from the company's operations, working capital efficiencies, or borrowing capacity.

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