What Is Accounts Payable AP Turnover Ratio?

However, due to potential risks or limitations in its interpretation, it should be used in conjunction with other top financial KPIs to drive business success. Generally speaking, a good accounts payable turnover ratio indicates that the payment of accounts payable obligations is done more quickly. Leveraging early payment discounts can help you save a lot of money from account payables. To promote timely payments vendors and suppliers often offer discounts and deals that can help you save money.

Calculate the Average Accounts Payable Balance

It can be used effectively as an accounts payable KPI to benchmark your accounts payable performance. In general, you want a high A/P turnover because that indicates that you pay suppliers quickly. However, you should always find out why your A/P turnover ratio is trending high or low. While a high A/P turnover can be positive, it could also mean that you pay bills too quickly, which could leave you without cash in an emergency.

What is the Accounts Payable Turnover Ratio, or AP Turnover Ratio?

Calculate the accounts payable turnover ratio formula by taking the total net credit purchases during a specific period and dividing that by the average accounts payable for that period. The average accounts payable is found by adding the beginning and ending accounts payable balances for that period of time and dividing it by two. 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. Accounting professionals calculate accounts payable turnover ratios by dividing a business’ total purchases by its average accounts payable balance during the same period.

How Can You Analyze Your Accounts Payable Turnover Ratio?

A high accounts payable turnover ratio is an important measure in evaluating your financial position, and gives insight to where you can improve. Vendors also use this ratio when they consider establishing a new line of credit or floor plan for a new customer. For instance, car dealerships and music stores often pay for their inventory with floor plan financing from their vendors. Vendors want to make sure they will be paid on time, so they often analyze the company’s payable turnover ratio.

What is a good accounts payable turnover ratio?

Most companies will have a record of supplier purchases, so this calculation may not need to be made. For instance, if a company’s accounts receivable turnover is far above that of its peers, there could be a reasonable explanation. However, it is rarely a positive sign, i.e. it typically implies the company is inefficient in its ability to collect cash payments from customers.

Completing the accounts payable turnover ratio formula

With the right tools and strategies in place, you can elevate your company’s financial performance and pave the way for a brighter future. Measures how efficiently a company pays off its suppliers and vendors by comparing total purchases to average accounts payable. 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.

• Vendors want to make sure they will be paid on time, so they often analyze the company’s payable turnover ratio.
• If your business has cash availability or can make a draw on its line of credit financing at a reasonable interest rate, then taking advantage of early payment discounts makes a lot of sense.
• One of the most important ratios that businesses can calculate is the accounts payable turnover ratio.
• If the accounts payable turnover ratio decreases over time, it indicates that a company is taking longer to pay off its debts.

But, investors may also seek evidence that the company knows how to use investments strategically. In that case, a business may take longer to pay off bills while it uses funds to benefit the business. The AP turnover ratio provides important strategic insights about the liquidity of a business in the short term, as well as a what are the three types of personal accounts company’s ability to efficiently manage its cash flow. The basic formula for the AP turnover ratio considers the total dollar amount of supplier purchases divided by the average accounts payable balance over a given period. The result is a figure representing how many times a company pays off its suppliers in that time frame.

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. Focuses on the management of a company’s liabilities and its ability to pay its suppliers on time. Simply, the AP turnover ratio gives a measure of the rate suppliers/vendors are paid off. In other words, your business pays its accounts payable at a rate of 1.46 times per year.

One way to improve your AP turnover ratio is to increase the inflow of cash into your business. More cash allows you to pay off bills, and the faster you receive cash, the fast you can make payments. Having a high AP turnover ratio is important in determining the effectiveness of your accounts payable management. It can show cash is being used efficiently, favourable payment terms, and a sign of creditworthiness.

Shaun Conrad is a Certified Public Accountant and CPA exam expert with a passion for teaching. After almost a decade of experience in public accounting, he created MyAccountingCourse.com to help people learn accounting & finance, pass the CPA exam, and start their career. If we divide the number of days in a year by the number of turns (4.0x), we arrive at ~91 days.

A high ratio suggests that a company is collecting payments from customers quickly, indicating effective credit management and strong sales. 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. The 91 days represents the approximate number of days on average that a company’s invoices remain outstanding before being paid in full. So the higher the payables ratio, the more frequently a company’s invoices owed to suppliers are fulfilled.