See Also:
Financial Ratios
Days Payable Outstanding
Time Saving Tip for Filing Vendor Invoices
Accrual Based Accounting
Accounts Receivable Turnover
Download ToolAccounts Payable Turnover Definition
The accounts payable turnover ratio indicates how many times a company pays off its suppliers during an accounting period. It measures how a company manages paying its own bills. A higher ratio is generally more favorable as payables are being paid more quickly. When placed on a trend graph accounts payable turnover analysis becomes simplified: the line raises and lowers just as the ratio does. Common adaptations used to calculate accounts payable turnover yield results like accounts payable turnover ratio in days, ap turnover in days, and more.
Accounts Payable Turnover Formula
A solid grasp of the accounts payable turnover ratio formula is of utmost importance to any business person. Though some ratios may or may not apply to different business models everyone has bills to pay. The need to understand ap turnover is universal.
Accounts payable turnover = Cost of goods sold / Average accounts payable
Or = Credit purchases / average accounts payable.
Purchases = Cost of goods sold + ending inventory - beginning inventory.
Accounts Payable Turnover Calculation
Accounts payable turnover is calculated by dividing total purchases made from suppliers by the average accounts payable amount during the same period.
Average Accounts payable is the average of the opening and closing balances for Accounts payable.
In real life, sometimes it is hard to get the number of how much of the purchases were made on credit. Investors can assume that all purchases are credit purchase as a shortcut. When this is done, it is important to remain consistent if the ratio is compared to that of other companies.
Example: assume annual purchases are $100,000; accounts payable at the beginning is $25,000; and accounts payable at the end of the year is $15,000.
The accounts payable turnover is: 100,000 / ((25,000 + 15,000)/2) = 5 times
An accounts payable turnover days formula is a simple next step.
365 days per year / 5 times per year = 73 days
Slightly different methods are applied to calculate ap days, ap turnover ratio in days, and other important metrics.This article outlines the fundamentals of how to calculate ap turnover.
Accounts Payable Turnover Example
Matt is the founder of a commercial flooring company called Floorco. Floorco has recently become successful. The company has just grown out of the start-up phase, where they made an effort to conserve cash by paying bills at the last minute. Floorco now wants to expand one of their marketing campaigns to involve suppliers. As a result, they wanted to decrease their accounts payable turnover days. This would place them on pleasant terms with vendors, gaining the trust needed to begin cooperative marketing. Matt is an expert in operations and does not know how to calculate ap turnover. He talks to his CPA, who finds these figures on Matt's books.
Annual purchases in 2009 $ 100,000
Accounts Payable at the beginning of 2009 $ 25,000
Accounts Payable at the end of 2009 $ 15,000
Once Matt's CPA finds these numbers he performs this ap turnover calculation:
(100,000 / ((25,000 + 15,000)/2) = 5 times
Matt's company, Floorco, turns over all accounts payable 5 times in a year. If we divide 12 by 5 we derive that it takes Floorco 2.4 months to close all payables (12 months in a year / 5 times per year = 2.4 months per cycle). Matt is well within the 90 day credit terms common to the industry. Still, if he wants to stand out with his vendors Matt will have to create a more favorable ap turnover ratio in days. Matt, after talking with his CPA, decides to update his bookkeeping software to one that monitors accounts payable more efficiently. This will allow him to speed up processing time in order to win the good graces of his suppliers. After half a year Matt achieves his goal, decreases his accounts payable turnover days to 30, and starts his new marketing campaign.
Accounts Payable Turnover Meaning
The meaning of accounts payable turnover is expressed in the example above. In short, a low accounts payable turnover shows that a company is receiving favorable credit policy from its suppliers. This means a company can extend payment of payables as much as possible to make full use of its cash.
A high accounts payable turnover ratio shows that this company is not receiving very favorable payment terms from its suppliers. If a company slows down its accounts payable turnover from one period to another period, this is a signal that either a company is having greater difficulty paying creditors or has decided to hold on to its money longer.
Resources
For statistical information about industry financial ratios, please go to the following websites:
www.bizstats.com and
www.valueline.com.