Accounts Payable Turnover Ratio: Definition, How to Calculate

The accounts payable turnover formula is calculated by dividing the total purchases by the average accounts payable for the year. The accounts payable turnover ratio of a company is often driven by the credit terms of its suppliers. For example, companies that obtain favorable credit terms usually report a relatively lower ratio.

Accounts payable at the beginning and end of the year were $12,555 and $25,121, respectively. The company wants to measure how many times it mobile book keeping app paid its creditors over the fiscal year. The ideal AP turnover ratio should allow it to pay off its debts quickly and reinvest money in itself to grow its business. A higher ratio also means the potential for better rates on purchases and loans. The investor can see that Company B paid off its suppliers at a faster rate than Company A. That could mean that Company B is a better candidate for an investment. However, the investor may want to look at a succession of AP turnover ratios for Company B to determine in which direction they’ve been moving.

1. Unlike many other accounting ratios, there are several steps involved in calculating your accounts payable turnover ratio.
2. That can help investors determine how capable one company is at paying its bills compared to others.
3. Here’s an example of how an investor might consider an AP turnover ratio comparison when investigating companies in which they might invest.
4. Below 6 indicates a low AP turnover ratio, and might show you’re not generating enough revenue.

Calculating the AP turnover in days, also known as days payable outstanding (DPO), shows you the average number of days an account remains unpaid. The formula for calculating the AP turnover in days is to divide 365 days by the AP turnover ratio. Mosaic also offers customizable templates to create unique dashboards that include the metrics you need to track most. Track invoice status metrics — both amount and count — to keep track of the revenue coming in.

Low AP turnover ratio

Measures how efficiently a company collects payments from its customers by comparing total credit sales to average accounts receivable. By calculating the AP turnover ratio regularly, you can gain insights into your payment management efficiency and make informed decisions to optimize your accounts payable process. Beginning accounts payable and ending accounts payable are added together, and then the sum is divided by two in order to arrive at the denominator for the accounts payable turnover ratio. Therefore, over the fiscal year, the company’s accounts payable turned over approximately 6.03 times during the year.

AP & FINANCE

Accounts payable and accounts receivable turnover ratios are similar calculations. It’s essential to compare the AP turnover ratio with industry benchmarks or historical data to assess performance relative to peers or previous periods. A significantly higher or lower ratio than industry averages may warrant further investigation into the company’s payment practices, supply chain efficiency, or financial strategy. Like all ‎xero expenses on the app store key performance indicators, you must ensure you are comparing apples to apples before deciding whether your accounts payable turnover ratio is good or indicates trouble. If you decide to compare your accounts payable turnover ratio to that of other businesses, make sure those businesses are in your industry and are using the same standards of calculation you are.

What a High AP Turnover Ratio Means

Many variables should be examined in conjunction with accounts payable turnover ratio. Only then can you develop a complete picture of a company’s financial standing. Your accounts payable turnover ratio tells you — and your vendors — how healthy your business is. Comparing this ratio year over year — or comparing a fiscal quarter to the same quarter of the previous year — can tell you whether your business’s financial health is improving or heading for trouble.

From simple to complex, these common accounting ratios are frequently used in businesses large and small to measure business efficiency, profitability, and liquidity. AP turnover shows how often a business pays off its accounts within a certain time period. Accounts receivable turnover ratio shows how often a company gets paid by its customers. Getting the data you need is important, but accessing it quickly ensures you can spend your time analyzing the metrics and developing proactive strategies to move the business forward. This comprehensive financial analysis gets to the heart of proactive decision-making so you’re always looking forward and incorporating agile planning to help the business succeed. Request a personalized demo today to find out how to take your analytics to the next level with our financial dashboards and improve efficiency and profitability for the company.

However, if calculated regularly, an increasing or decreasing accounts payable turnover ratio can let suppliers know if you’re paying your bills faster or slower than during previous periods. Tracking and analyzing your AP turnover is an important part of evaluating the company’s financial condition. If your AP turnover is too low or too high, you need a ratio analysis to identify what’s causing your AP turnover ratio to fall outside typical SaaS benchmarks. You also need quick access to your most important metrics without taking valuable time entering them manually into Excel from different source systems and financial statements. Creditors use the accounts payable turnover ratio to determine the liquidity of a company.

Here’s an example of how an investor might consider an AP turnover ratio comparison when investigating companies in which they might invest. We believe everyone should be able to make financial decisions with confidence. Many, or all, of the products featured on this page are from our advertising partners who compensate us when you take certain actions on our website or click to take an action on their website.