![]() ![]() This inspires a greater level of confidence on the part of both lender and investor. Not only is a higher ratio result a sign of financial strength, it also shows creditors that the business has an established track record of paying its bills in a timely manner. The higher the payables turnover ratio, the more adept a business is at paying its suppliers frequently and consistently. So what does the payables turnover ratio measure? Now let's find out how the payables turnover ratio is used to evaluate a company's efficiency. This information can be particularly useful when you’re analyzing ratio results over a period of time, because it lets you gauge any change in an organization’s payment habits.Ī slowing trend in supplier payments often serves as a warning signal that a firm’s financial health may be declining. If you discover that a business has a payable turnover ratio of 6, for example, it means the company you’re evaluating pays off its average supplier balance owing 6 times a year, or about every 60 days. So what does accounts payable turnover mean? This financial ratio allows you to compare a firm’s credit purchases against its average accounts payable (AP) amount, in order to determine how frequently it pays its suppliers. The accounts payable turnover ratio, which is also known as the creditors turnover ratio, provides you with just such an efficiency measurement. When you’re considering buying stock in a particular company, it can be helpful to know how efficient that company is at meeting its supplier debt obligations. Knowing your accounts payable turnover is an easy way to manage your vouchers, analyze your payments, and maintain supplier relations.Definition - What is Accounts Payable Turnover Ratio? A new supplier may ask for your accounts payable turnover ratio before they agree to do business with you so they know when you’re likely to pay your bills. If the ratio is decreasing over time, you’re paying your suppliers more slowly. In general, it’s best to calculate your accounts payable turnover ratio for multiple periods and compare your results. Although this typically means you have a strong cash flow, it could also mean you are not efficiently using creditor terms or are paying suppliers too soon. A higher turnover calculation means you are paying your current debts faster. In the example above, your average account payable for the year would be outstanding for 18.25 days. You can also divide the number of days in a period by your accounts payable turnover to find out the number of days your payables were outstanding. If you have total supplier purchases of $100,000 for the year and an average accounts payable balance of $5,000, your accounts payable turnover is 20. ![]() The turnover tells you how many times in a period you pay your average accounts payable balance. ![]() You can calculate your accounts payable turnover by dividing the total cost of sales by the average balance in accounts payable. ![]() Your accounts payable turnover is the rate you pay your bills. ![]()
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