Accounts Payable Turnover Definition
The accounts payable turnover ratio indicates how many times a company pays off its suppliers during an accounting period. It also 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, A/P turnover in days, and more. A useful tool in managing and measuring the efficiency of paying bills is a Flash Report.
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 A/P 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.
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Accounts Payable Turnover Calculation
Calculate accounts payable turnover 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. As a result, it is important to remain consistent if the ratio is compared to that of other companies.
For 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 A/P days, A/P turnover ratio in days, and other important metrics. This article outlines the fundamentals of how to calculate A/P turnover. For more ways to improve your cash flow, download the free 25 Ways to Improve Cash Flow whitepaper.
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