Accounts Payable Turnover Ratio: Formula & Examples

Have you ever wondered how businesses efficiently manage their bills? The Accounts Payable (AP) turnover ratio answers this question. This financial metric dives into how quickly a business pays suppliers, offering valuable insights into your cash flow management and overall financial health.

This article explains all about the accounts payable turnover, including what it is, its formula, how to calculate it, and its uses.

What is the accounts payable turnover ratio?

The AP turnover ratio measures the number of times a business pays its accounts payable within a specific period, usually a year. It shows how effectively a company uses cash to settle debts and maintain good supplier relationships.

Formula for AP turnover ratio

Calculating the AP turnover ratio is simple as follows:

AP turnover ratio = Cost of Goods Sold (COGS) / Average accounts payable

Here's what each element stands for:

• Cost of Goods Sold (COGS): This represents the total cost of goods purchased and sold during the period. Businesses report this figure in their income statement.
• Average accounts payable: This represents the average balance of accounts payable throughout the period. One should add the opening and closing balances of accounts payable and divide by two to arrive at this figure.

How to calculate the AP turnover ratio?

Suppose a company's COGS for the year is 10,00,000, and the average accounts payable balance is 1,00,000.

AP turnover ratio = 10,00,000 / 1,00,000 = 10

This means the company paid off the suppliers ten times on average during the year.

Uses of the accounts payable turnover ratio

• Assess cash flow efficiency: A higher ratio indicates that businesses settle bills quickly, suggesting efficient cash management. However, an excessively high ratio could mean businesses miss out on early payment discounts.
• Evaluate supplier relationships: A healthy ratio signifies timely payments, potentially strengthening relations with suppliers.
• Benchmark against industry standards: Comparing the AP turnover ratio to industry averages helps you evaluate the performance.
• Identify potential risks: A declining ratio might signal cash flow issues or strained supplier relationships.