Accounting Data Analysis Management Training

GPI 053 – Financial statistics – calculate and chart a quick AR/AP ratio.

Once you have prepared your financial statements at the end of the monthly closing cycle, chart accounts receivable (AR) to accounts payable (AP), as a ratio. Include any unbilled but earned sales for inclusion into AR (since these invoices normally should be in AR) and any accrued AP invoices not in the official AP Aging (invoices not included in the final aging but accrued before closing). Some include their company’s line of credit as well as the AP but the intention of this simple ratio is the measurement of short term receivables to payables. If that is your intention as well, do not include long term debt at this point.

Note: You may want to publish two ratios if the line of credit is large. A large LOC balance normally only requires interest only charges and no principal payments. If you were to finance the LOC, you most likely would select a long term finance option.

What this AR/AP ratio does not take into account is payroll which is paid out each week and never appears on the AP. At month end, when you calculate AP, you might add in the accrued payroll (earned but not paid until the following month).

However you decide to calculate this ratio; do it consistently once you decide and try not to change it for historical comparison purposes. The important thing to track and watch is the trend that emerges over time.

Profitable companies: If you are making money, the profit will pay down the line of credit upon receipt since normally all cash receipts on a LOC are swept to the loan balance upon receipt (reducing the line balance and ultimately interest charges).

Unprofitable companies: If you are losing money, accounts receivable will start to shrink compared to accounts payable. There may be other reasons where this money is going (i.e. Purchase of more equipment, decision to increase in sitting available inventory, increased distributions to owners for payment of taxes for example).

0 comments on “GPI 053 – Financial statistics – calculate and chart a quick AR/AP ratio.

Leave a Reply

%d bloggers like this: