Accounts Payable Turnover

Last Updated: Jun 6, 2019

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Last Edited By :

Created On : Jun 6, 2019

Accounts payable turnover is a ratio that measures the speed with which a company pays its suppliers. If the turnover ratio declines from one period to the next, this indicates that the company is paying its suppliers more slowly, and may be an indicator of worsening financial condition.

A change in the turnover ratio can also indicate altered payment terms with suppliers, though this rarely has more than a slight impact on the turnover ratio. If a company is paying its suppliers very quickly, it may mean that the suppliers are demanding very fast payment terms, or that the company is taking advantage of early payment discounts.

To calculate the accounts payable turnover ratio, summarize all purchases from suppliers during the measurement period, and divide by the average amount of accounts payable during that period. The formula is:

Total supplier purchases
(Beginning accounts payable + Ending accounts payable) / 2

The formula can be modified to exclude cash payments to suppliers, since the numerator should include only purchases on credit from suppliers. However, the amount of up-front cash payments to suppliers is normally so small that this modification is not necessary. The cash payment exclusion may be necessary if a company has been so late in paying suppliers that they now require cash in advance payments.