Accounts Payable Turnover

By benchmarking with industry statistics and doing some internal analysis, you can decide when it’s the best time to pay your vendors. Your company’s accounts payable turnover ratio (and days payable outstanding) may be considered a higher ratio or lower ratio in relation to other companies. To balance cash inflows and outflows, compare your accounts payable turnover ratio with your accounts receivable turnover ratio.

AP Turnover Ratio Formula & Calculator Tool

Analyzing the following SaaS finance metrics and financial statements will help you convey the financial and operational help of your business so partners can be proactive about necessary changes. Drawbacks to the AP turnover ratio relate to the interpretation of its meaning. How does the accounts payable turnover ratio relate to optimizing cash flow management, external financing, and pursuing justified growth opportunities requiring cash? In corporate finance, you can add immense value by monitoring and analyzing the accounts payable turnover ratio. Transform the payables ratio into days payable outstanding (DPO) to see the results from a different viewpoint.

Corporate finance should perform a broader financial analysis than an accounts payable analysis to investigate outliers from the trend. The AP turnover ratio is one of the best financial ratios for assessing a company’s ability to pay its trade credit accounts at the optimal point in time and manage cash flow. The accounts payable turnover formula is calculated by dividing the total purchases by the average accounts payable for the year. Like all key performance indicators, you must ensure you are comparing apples to apples before deciding whether your accounts payable turnover ratio is good or indicates trouble. 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.

1. Calculating the AP turnover in days, also known as days payable outstanding (DPO), shows you the average number of days an account remains unpaid.
2. During the current year Bob purchased $1,000,000 worth of construction materials from his vendors.
3. Improving your AP turnover ratio is crucial to managing cash flow and ensuring that your company is financially healthy.
4. The DPO should reasonably relate to average credit payment terms stated in the number of days until the payment is due and any discount rate offered for early payment.

Completing the accounts payable turnover ratio formula

Improve cash flow management and forecast your business financing needs to achieve the optimal accounts payable turnover ratio. Your company’s accounts payable software can automatically generate reports with total credit purchases for all suppliers during your selected period of time. If it’s not automated, you can create either standard or custom reports on demand. Before you can understand how to calculate and use the accounts payable turnover ratio, you must first understand what the accounts payable turnover ratio is. In short, accounts payable (AP) represent the money you owe to vendors or suppliers.

Understanding accounts payable turnover ratio

To find the average accounts payable, simply add the beginning and ending accounts payable together and divide by two. In other words, your business pays its accounts payable at a rate of 1.46 times per year. Company A reported annual purchases on credit of $123,555 and returns of $10,000 during the year ended December 31, 2017. Accounts payable at the beginning and end of the year were $12,555 and $25,121, respectively. The company wants to measure how many times it paid its creditors over the fiscal year. However, an increasing ratio over a long period of time could also indicate that the company is not reinvesting money back into its business.

Conversely, while a decreasing turnover ratio might mean the company does not have the financial capacity to pay debts, it could also mean that the company is reinvesting in the business. Other factors such as increased disputes with suppliers, staffing and technical issues could lead to a decreasing AP turnover ratio. On a different note, it might sometimes be an indication that the company is failing to reinvest in the business. As a measure of short-term liquidity, the AP turnover ratio can be used as a barometer of a company’s financial condition. AP turnover ratio and days payable outstanding both measure how quickly bills are paid but using different units of measurement.

The rules for interpreting the accounts payable turnover ratio are less straightforward. To improve your AP turnover ratio, it’s important to know where your current ratio falls within SaaS benchmarks. From there, use the following tips to collaborate with other departments to help improve financial ratios as needed.

Automatically or Manually Calculate AP Turnover Ratio

Or apply the calculation comparing the payables turnover in days to the receivables turnover in days if that’s easier for you to understand. Compare the AP creditor’s turnover ratio to the accounts receivable turnover ratio. You can compute an accounts receivable turnover to accounts payable turnover ratio if you want to. If so, your banker benefits from earning interest on bigger lines of credit to your company. Tracking and analyzing your AP turnover is an important part of evaluating the company’s financial condition. If your AP turnover is too low or too equity equation high, you need a ratio analysis to identify what’s causing your AP turnover ratio to fall outside typical SaaS benchmarks.

Do my current liabilities impact my AP turnover ratio?

The “Supplier Credit Purchases” refers to the total amount spent ordering from suppliers. My Accounting Course  is a world-class educational resource developed by experts to simplify accounting, finance, & investment analysis topics, so students and professionals can learn and propel their careers. Our partners cannot pay us to guarantee favorable reviews of their products or services. We believe everyone should be able to make financial decisions with confidence. If we divide the number of days in a year by the number of turns (4.0x), we arrive at ~91 days. The more a supplier relies on a customer, the more negotiating leverage the buyer holds – which is reflected by a higher DPO and lower A/P turnover.

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).

Accounts payable appears on your business’s balance sheet as a current liability. Accounts payable turnover ratio is a measure of your business’s liquidity, or ability to pay its debts. The higher the accounts payable turnover ratio, the quicker your business pays its debts.

As you can see, Bob’s average accounts transfer pricing payable for the year was $506,500 (beginning plus ending divided by 2). This means that Bob pays his vendors back on average once every six months of twice a year. This is not a high turnover ratio, but it should be compared to others in Bob’s industry.