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Accounts Payable Turnover

 

Accounts payable turnover ratio shows how quickly company is paying to its suppliers for services or goods and materials. If payables turnover is very low, it may signify different reasons behind it:

  • Company is in financial trouble and cannot pay faster for its suppliers.
  • Such ratio is normal for this industry niche.

 

To know which reason exactly does influence to the particular company, this ratio should be compared to previous periods of the same company and to other companies in the industry.

 

Formula


(1) Accounts payable turnover =  Total supplier purchases / Accounts payable

 

Another formula:

 

(2) Accounts payable turnover =  COGS / Accounts payable

 

* In both formulas annual average of accounts payable should be used, especially it is important to use average if business is highly seasonal. Accounts payables are provided in company’s balance sheet. If to use COGS (cost of goods sold) or total supplier purchases, depends on the data that are available. You can always find COGS in income statement but ‘total supplier purchases’ are more accurate for this ratio. Usually ‘total supplier purchases’ make the major part of COGS, however, significant labor costs may make the difference for this ratio. If to be very accurate, ‘total supplier purchases’ should be used, and if there were some cash purchases from suppliers with instant payment, those purchases should be eliminated from total supplier purchases. 

 

Accounts payables of one company are accounts receivables for another company. ‘Payable turnover ratio’ usually is calculated together with ‘Receivables turnover ratio’. 

 






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