Definition:
Accounts payable turnover is a financial ratio that measures how efficiently a company pays its suppliers. It indicates how quickly a company turns over its accounts payable, which can impact its cash flow and relationships with suppliers.
Formula:
Accounts Payable Turnover = Cost of Goods Sold / Average Accounts Payable
How to calculate accounts payable turnover:
- Determine the cost of goods sold: This is the total cost of the goods or services sold during a period.
- Calculate the average accounts payable: Add the beginning and ending balances of accounts payable for the period and divide by 2.
- Divide the cost of goods sold by the average accounts payable: This will give you the accounts payable turnover ratio.
Why is accounts payable turnover important?
- Cash flow management: A high accounts payable turnover indicates that a company is paying its suppliers quickly, which can improve its cash flow.
- Supplier relationships: A low accounts payable turnover may indicate that a company is taking longer to pay its suppliers, which could strain relationships and potentially lead to credit restrictions.
- Financial analysis: Accounts payable turnover is a key financial ratio that is used to assess a company’s financial health and efficiency.
A high accounts payable turnover is generally considered a positive sign, as it indicates that a company is managing its cash flow effectively and maintaining good relationships with its suppliers. However, it’s important to consider other factors, such as the industry and the company’s specific circumstances, when interpreting this ratio.
