Accounts Payable Turnover Ratio: Definition, Formula & Example

The accounts payable turnover ratio, or AP turnover ratio, is a financial metric that measures the rate at which you pay your suppliers and vendors. It reflects how many times your company can pay off its accounts payable within a given accounting period. A higher ratio indicates faster payments, while a lower ratio may suggest potential cash flow issues or delays in settling debts. The accounts payable turnover ratio measures the rate at which a company pays off these obligations, calculated by dividing total purchases by average accounts payable. The AP turnover ratio, on the other hand, calculates how many times a company pays its average accounts payable balance in a period. In other words, the accounts payable turnover ratio is how many times a company can pay off its average accounts payable balance during the course of a year.

The accounts receivable turnover ratio is an accounting measure used to quantify a company’s effectiveness in collecting its receivables, or the money owed to it by its customers. The ratio demonstrates how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or paid. Investors can use the accounts payable turnover ratio to determine if a company has enough cash or revenue to meet its short-term obligations. Creditors can use the ratio to measure whether to extend a line of credit to the company. Creditors are also parties – typically suppliers – to whom the company owes money. Hence, the creditors turnover ratio also gives the speed at which a company pays off its creditors.

Therefore, over the fiscal year, the company takes approximately 60.53 days to pay its suppliers. A low ratio may indicate slower payment to suppliers, which can strain relationships and affect credit terms. However, an increasing ratio over a long period of time could also indicate that the company is not reinvesting money back into its business. This could result in a lower growth rate and lower earnings for the company in the long term.

1. Accounts payable turnover ratio is a measure of your business’s liquidity, or ability to pay its debts.
2. This may be due to favorable credit terms, or it may signal cash flow problems and hence, a worsening financial condition.
3. The accounts payable turnover ratio measures the rate at which a company pays off these obligations, calculated by dividing total purchases by average accounts payable.
4. A significantly higher or lower ratio than industry averages may warrant further investigation into the company’s payment practices, supply chain efficiency, or financial strategy.
5. In that case, a decreasing ratio could show cash flow problems or financial distress.

How is the trade payables turnover ratio related to the accounts payable turnover ratio?

Accounts Payable (AP) Turnover Ratio and Accounts Receivable (AR) Turnover Ratio are both important financial metrics used to assess different aspects of a company’s financial performance. Then, divide the total supplier purchases for the period by ad valorem property tax the average accounts payable for the period. Ramp Bill Pay automates your entire accounts payable process, helping you get your AP turnover ratio to wherever you want it to be with no manual work.

How to Calculate AP Turnover?

You can calculate your AP turnover ratio for any accounting period that you want—monthly, quarterly, or annually. Many businesses calculate AP turnover ratios monthly and plot the results on a trendline to see how their ratio changes over time. To calculate the ratio, determine the total dollar amount of net credit purchases for the period. As you can see, Bob’s average accounts payable full bookkeeping denver for the year was $506,500 (beginning plus ending divided by 2).

For example, if your goal is to get more favorable payment terms from suppliers, a decreasing AP turnover ratio could be a signal that your approach is working. A low AP turnover ratio means that you’re paying your suppliers back a bit more slowly. For example, it’s often favorable to hold onto cash as long as possible so you can use that working capital in other areas of your business. In summary, both ratios measure a company’s liquidity levels and efficiency in meeting its short-term obligations. They may be referred to differently depending on the region, industry, or even within different sectors of some companies, but they denominate the same financial metric. Effective cash management helps a company balance the goal of paying vendors quickly with the need to maintain a specific cash balance for operations.

What Is the Accounts Payable Turnover Ratio?

With the right tools and strategies in place, you can elevate your company’s financial performance and pave the way for a brighter future. As stated above, the AP turnover ratio is (net credit purchases) / (average accounts payable). The AR turnover ratio measures how quickly receivables are collected, while AP turnover reports how quickly purchases are paid in cash.

If you decide to compare your accounts payable turnover ratio to that of other businesses, make sure those businesses are in your industry and are using the same standards of calculation you are. A bigger concern, though, would be if your accounts payable turnover ratio continued to decrease with time. The accounts payable turnover ratio of a company is often driven by the credit terms of its suppliers. For example, companies that obtain favorable credit terms usually report a relatively lower ratio. Large companies with bargaining power who are able to secure better credit terms would result in lower accounts payable turnover ratio (source).

If, for example, a vendor offers a 1% discount for payments within ten days, the business can pay promptly and earn the discount. When a business can increase its AP turnover ratio, it indicates that it has more current assets available to pay suppliers faster. The formula can be modified to exclude cash payments to suppliers, since the numerator should include only purchases on credit from suppliers. However, the amount of up-front cash payments to suppliers is normally so small that this modification is not necessary. The cash payment exclusion may be necessary if a company has been so late in paying suppliers that they now require cash in advance payments. A high ratio suggests that a company is collecting payments from customers quickly, indicating effective credit management and strong sales.

Accounts Payable Turnover Ratio: Definition, Formula & Example

The ratio is a measure of short-term liquidity, with a higher payable turnover ratio being more favorable. If the accounts payable turnover ratio decreases over time, it indicates that a company is taking longer to pay off its debts. Suppose the company in question has not renegotiated payment terms with its suppliers. In that case, a decreasing ratio could show cash flow problems or financial distress. The accounts payable turnover ratio measures only your accounts payable; other short-term debts — like credit card balances and short-term loans — are excluded from the calculation. The accounts payable turnover ratio can be calculated for any time period, though an annual or quarterly calculation is the most meaningful.