As an accountant or simply a business owner, there are numerous terms of accounts that you need to know about and one of them is the Accounts Payable Turnover Ratio. There are numerous people who are not familiar with the term and this is the main reason why in the article, we are going to talk about the Accounts Payable Turnover Ratio in detail.
Understanding the Meaning of Accounts Payable Turnover Ratio
Also known as the Payables turnover or the creditor’s turnover ratio, the Accounts Payable Turnover Ratio refers to a liquidity ratio which is used to measure the standard number of times a company pays its creditor during an accounting period. The ratio is usually a measure of short-term liquidity and if the payable turnover ratio is high then it is more favourable. There is a specific formula that is used to calculate the Accounts Payable turnover ratio and in the next part of the guide, we are going to talk about the same.
Examining the formula for the Accounts Payable Turnover Ratio
If you want to find the Ap Turnover ratio of your organisation then, it is important for you to know about the formula that is used for the same.
The payable Turnover ratio is calculated by dividing the Net credit Purchases by Average Accounts Payable. There are certain cases when the cost of goods sold also known as COGS is used in the place of Net credit Purchases as the numerator. The denominator which is Average accounts Payable is the sum of accounts payable at the start of the accounting period and that of at the end which is ultimately divided by 2.
What is the interpretation of the Accounts Payable Turnover Ratio?
Creditors can determine the company’s short-term liquidity and, in turn, creditworthiness by looking at the turnover ratio for accounts payables turnover. When a ratio is high, it means that suppliers are being paid on time for credit purchases. A high number can be the result of suppliers expecting prompt payments, or it could mean that the business is actively trying to raise its credit score or attempting to take advantage of early payment discounts.
If you see a low ratio then, this indicates a slow payment to suppliers and this can be because of favourable credit terms. Although a decreasing ratio can refer to the financial distress of a company, it is not always the case. It is also possible that the company has negotiated better payment terms as this permits the company to make fewer payments without any fine.
Just like the majority of financial metrics, the turnover ratio of a company is best examined in comparison with other companies in the same industry. I am sure that you have easily understood the Accounts Payable Turnover ratio with the information that we have shared here.
