Accounts Payable Turnover
Accounts Payable Turnover Ratio is a liquidity metric that evaluates how fast a company pays off its suppliers / creditors. The metric shows how many times in a year a company pays its average accounts payable.
Accounts Payable Turnover Ratio
Accounts Payable Turnover Ratio is a liquidity metric that evaluates how fast a company pays off its suppliers / creditors. The metric shows how many times in a year a company pays off its suppliers.
Turnover trends can help a company assess its cash situation. Just as the accounts turnover receivable ratio can be used to judge a company's incoming cash situation, the account payable turnover ratio can demonstrate how a business handles its outgoing payments.
Accounts Payable Turnover Formula
The accounts payable turnover ratio is calculated by dividing the total amount of purchases made on credit by the average accounts payable balance for any given period. There is no single line item that tells how much a company purchased in a year.
The cost of sales in the income statement shows what was sold, but the company may have purchased either more or less than it eventually sold. Therefore, the cost of goods sold is adjusted by the change in inventory to determine the purchases made.
Accounts Payable Turnover Interpretation
The accounts payable turnover ratio's main purpose is to measure short term liquidity. Payment requirements usually vary from supplier to supplier, depending on its size, financial capabilities and the industry norm.
A high account payable turnover ratio means there is a relatively short time between purchase of goods and services and payment for them. This implies that the company produces cash fast. Conversely, a lower accounts payable turnover ratio usually signifies that a company is slow in paying its suppliers, suggesting that the company has cash flow troubles.
It should be noted that a high accounts payable is not always in the best interest of a company. Many companies extend the period of credit turnover (i.e. lower accounts payable turnover ratios) getting extra liquidity.