# Accounts Payable Turnover Ratio

Asset management (turnover) ratios Print Email

## Definition

The accounts payable turnover ratio is an accounting liquidity measure that evaluates how quickly a company pays its creditors (suppliers). The ratio shows how often a company pays its average accounts payable in a given period (typically 1 year). An accounts payable turnover ratio measures the number of times a company pays its suppliers during a given fiscal period.

Accounts payable turnover ratios can help a company assess its cash position. Just as accounts receivable turnover ratios can be used to assess a company's incoming cash situation, this figure can show how a company handles its outgoing payments.

## Calculation (Formula)

Accounts-payable turnover 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 (statement of comprehensive income) shows what was sold, but the company may have purchased either more or less than it eventually sold. The result would be either an increase, or a decrease in inventory. To calculate the purchases made, the cost of goods sold is adjusted by the change in inventory as follows:

Purchases = Cost of sales + Ending inventory – Starting inventory

"Average Accounts Payable" is the average amount of accounts payable outstanding during the same period.

The accounts receivable turnover ratios can be expressed in terms of a number of days by dividing the result into 365 (it's Days Payable Outstanding, DPO):

The calculation of the accounts payable turnover ratio does not depend on the standard of reporting (IFRS or US GAAP). The ratio is calculated the same way regardless of the reporting standard used. However, the way in which these amounts are reported may differ between IFRS and US GAAP due to differences in accounting standards and disclosure requirements. However, this would not affect the calculation of the accounts payable turnover ratio.

## Accounts Payable Turnover Ratio Norms and Limits

Payment requirements will usually vary from supplier to supplier, depending on its size and financial capabilities. If the accounts payable turnover ratio is very high, it suggests that the company is paying its bills promptly and has a good relationship with its suppliers. A high ratio may indicate effective management of working capital and liquidity.

If the accounts payable turnover ratio is very low, it may indicate that the company is taking an extended time to pay its bills or taking advantage of long payment terms offered by its suppliers. This could put a strain on the company's relationships with its suppliers and potentially harm its credit rating.

But a high accounts payable turnover ratio 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.

Here are a few ways a company can optimize its accounts payable turnover ratio:

1. Negotiate favorable payment terms with suppliers: By negotiating longer payment terms with suppliers, a company can increase its accounts payable turnover ratio.

2. Streamline the accounts payable process: By improving the efficiency of its accounts payable process, a company can reduce the amount of time it takes to pay its bills and increase its accounts payable turnover ratio.

3. Implement an electronic payment system: By using electronic payment systems, a company can reduce the time it takes to process and pay bills, which can increase its accounts payable turnover ratio.

4. Regularly review and reconcile accounts payable: By regularly reviewing and reconciling its accounts payable, a company can identify and correct any discrepancies or errors that may be delaying payments and impacting its accounts payable turnover ratio.

5. Take advantage of early payment discounts: By taking advantage of early payment discounts offered by suppliers, a company can reduce its accounts payable balance and increase its accounts payable turnover ratio.

It's important to note that optimizing the accounts payable turnover ratio is just one aspect of managing a company's finances, and a high ratio may not always be the best choice for a particular business. It's important to consider all factors and make informed decisions that are in the best interest of the company as a whole.

## Importance of Accounts Payable Turnover Ratio

Calculating and tracking the accounts payable turnover ratio is important for a company because it provides insight into the company's cash management and supplier relations. The ratio measures how quickly a company is paying its bills, and it can help a company identify potential problems with its accounts payable process.

A high accounts payable turnover ratio indicates that the company is paying its bills promptly, which may lead to better relationships with suppliers and improved access to favorable payment terms. On the other hand, a low ratio may indicate that the company is taking too long to pay its bills, which could hurt its relationship with suppliers and affect its credit rating.

Overall, tracking the accounts payable turnover ratio is an important aspect of financial analysis and provides valuable information for decision-making, such as assessing the efficiency of working capital management, evaluating supplier relationships, and forecasting future cash flows.

## Formula in ReadyRatios Analysis Software

Accounts payable turnover ratio = 365 / Days payable outstanding

F2 – Statement of comprehensive income (IFRS).
F1[b], F1[e] - Statement of financial position (at the [b]egining and at the [e]nd of the analysed period).
NUM_DAYS – Number of days in the the analysed period.
365 – Days in year.

Note: Employee benefits are considered here as a part of purchases because they are also account payables and also form cost of sales.

Quote Tony Abuli, 26 September, 2012
These notes are so helpful. i think i will perform well in my final acounting for business examinations tomoroow
Quote Guest, 6 February, 2013
Thank you for explaining some important terms.
Quote Imran, 30 September, 2013
very nice very helpful nice work.
Quote ikah, 30 December, 2013
it's very useful. but, how about if purchases is not given.
can we use COGS (cost of good sold) instead of purchases?
Quote Tim, 28 January, 2014
Excellent, simply explained information
Quote Guest, 16 May, 2014
Quote
ikah wrote:
it's very useful. but, how about if purchases is not given.
can we use COGS (cost of good sold) instead of purchases?
Quote Hanan AK, 30 June, 2014
hi! very useful information. i want to know...is it possible to use closing value of payable if we cannot calculate average payables.

i means :- is this formula is correct if average cannot be calculated:-

payables turn over ratio = purchases or cos/ payables (the closing value of payables rather than the avg)

Quote Mani, 24 September, 2014
Quote
Imran wrote:
very nice very helpful nice work.
of what significance is the AP ratio to a company's finance strategy?
Quote Bones, 24 September, 2014
Say your company has a High AP turnover ratio, and a low AR Turnover, so AR is taking long to be collected, and AP is being paid our relatively quick.

What concerns should this company have?
Quote , 25 September, 2014
Quote
Say your company has a High AP turnover ratio, and a low AR Turnover, so AR is taking long to be collected, and AP is being paid our relatively quick.

What concerns should this company have?
It has to involve additional financing to replace funds "frozen" in Accounts Payables.
Quote Guest, 16 December, 2014
Nicely written article.. Simple and Effective.
I have a query - What if my Accounts Payable Turnover Ratio is consistently negative?
Quote Guest, 11 February, 2015
Quote Guest, 23 April, 2015
I would like to view the answer to Ikah's question on AP turnover ratio: if purchase is not give, can we use COGS(cost of good sold) instead of purchases?  I have the same exact situation.

Thank you,
Quote Abid Ali, 9 January, 2016
Aslam.O.Alikum dear sir i have a question when calculating Average Collection period and Average receivable and number of days in inventories we must take 365 days its wrong becasue most of the companies work 5 or 6 days in a week therefore we take the working days of the company no days in a year such as 240 or 260 days in a year
Quote Abid Ali, 9 January, 2016
Quote , 11 January, 2016
Quote
Abid Ali wrote:
Aslam.O.Alikum dear sir i have a question when calculating Average Collection period and Average receivable and number of days in inventories we must take 365 days its wrong becasue most of the companies work 5 or 6 days in a week therefore we take the working days of the company no days in a year such as 240 or 260 days in a year
It's possible but you calculate collection period in working days. Traditionally it's calculated in calendar days so you take all days of the year.
Quote , 29 March, 2020
Nicely explained...
Quote Guest, 18 June, 2021
Hi, I'm a MBA student and right now i'm doing a research paper regarding the working capital analysis. I would like to refer the data from your website, would you available the data of  "account payable (days) - breakdown by industry"? because I saw "Inventory turnover (days) ", "account receivable (days) " and "Asset turnover days" these three ratios under the activity. But I didn't find the account payable (days). I'm looking forward your reply and I'm so appreciate that if you have it. Thank you.
Quote , 7 February, 2023
Quote
But I didn't find the account payable (days).
See Days Payable Outstanding above.