If you accessed this article, it means that you are probably looking for information about accounts payable turnover ratio. Here is the information that you’re looking for, in that case.
The accounts payable turnover ratio is a liquidity ratio that indicates the ability a company has to repay its accounts payable. The repayment is done by comparing net credit purchases to the average accounts payable during a period. Basically, the accounts payable ratio shows how many times a firm can repay its average accounts payable balance over the year.
If you’d like to find out more about this concept, then this article tells you what you want to know.
Accounts Payable Turnover Ratio – Why is it Important?
Through this calculation, creditors can analyze a firm’s liquidity by measuring how easy it can repay its present suppliers and vendors. Firms that can repay supplies often throughout the year show to a creditor that they are able to make principle payments and regular interest.
In addition, vendors use this ratio when they think about establishing a new line of floor or credit plan for a new customer. As an example, music stores and car dealerships usually pay for their inventory with floor financing from their vendors. So, vendors want to know for sure that they will receive the payment on time, and they can analyze the firm’s payable turnover ratio – hence why it’s important.
Analyzing Accounts Payable Turnover Ratio
So, if the accounts payable turnover ratio shows the speed with which a firm repays its vendors, it is used by creditors and supplies to help decide if to grant credit to a firm. As usual with most liquidity ratios, a higher one is preferred over a lower one.
If the ratio is higher, it shows suppliers and creditors that the firm is on time with bills. It also shows that new vendors will be repaid quickly. Moreover, if the turnover ratio is high, it can be used to negotiate favorable credit terms in the future.
Just like with all ratios, this one is specific to certain industries. Each industry has its own standards. Therefore, this ratio is best used to compare similar companies in the same industry.
How is it Calculated?
If you want to calculate the accounts payable turnover ratio, you have to divide the total purchases by the average accounts payable for the year. The formula should go like this:
Usually, the total purchases number is not readily available on any general-purpose financial statement. That means they will have to be calculated. You can do so by adding the ending inventory to the cost of goods sold and subtracting the beginning inventory.
Companies usually keep a record of supplier purchases, so you don’t have to also do this calculation.
In order to find the average accounts payable, you have to add the beginning and ending accounts payable together and divide by two.
Now that you made it to the end of the article, you are hopefully more familiar with this concept and what it includes. It may seem complicated at first, but you’ll be able to calculate it once you know how it’s done.