Accounts Payable Turnover Ratio

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Definition

Accounts payable turnover ratio is an accounting liquidity metric that evaluates how fast a company pays off its creditors (suppliers). The ratio shows how many times in a given period (typically 1 year) a company pays its average accounts payable. An accounts payable turnover ratio measures the number of times a company pays its suppliers during a specific accounting period.

Accounts payables turnover trends can help a company assess its cash situation. Just as accounts receivable ratios can be used to judge a company's incoming cash situation, this figure can demonstrate how a business 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.

Accounts payable turnover ratio = Total purchases / Average accounts payable

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

Again, as with the accounts receivable turnover ratios, this can be expressed in terms of a number of days by dividing the result into 365:

Days Payable Outstanding (DPO) = 365 /Accounts payable turnover ratio

Norms and Limits

Payment requirements will usually vary from supplier to supplier, depending on its size and financial capabilities. A high ratio means there is a relatively short time between purchase of goods and services and payment for them. Conversely, a lower accounts payable turnover ratio usually signifies that a company is slow in paying its suppliers.

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.

Exact Formula in the ReadyRatios Analytic Software

Days Payable Outstanding = ((F1[b][TradeAndOtherCurrentPayables] + F1[e][TradeAndOtherCurrentPayables]+F1[b][CurrentProvisionsForEmployeeBenefits] +F1[e][CurrentProvisionsForEmployeeBenefits])/2)/((F2[CostOfSales]+ F1[e][Inventories] - F1[b][Inventories])/NUM_DAYS)

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. 

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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)

please reply..thanks....
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 Vit. A., 24 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, 17 January, 2015
VERY WELL EXPLAINED
Quote Guest, 11 February, 2015
Very helpful, thanks a lot.
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
please reply if i  m wrong
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