What Is Accounts Payable Turnover Ratio?

Accounts payable turnover rate refers to the degree of liquidity of accounts payable.

Accounts payable turnover rate

If the company's accounts payable turnover rate is lower than the industry

Formula of accounts payable turnover rate:

Accounts payable turnover rate = (

Use of accounts payable turnover rate:

The accounts payable turnover rate reflects the company's ability to use the funds of the supplier for free. Reasonable accounts payable turnover rate comes from comparison with the same industry and the company's historical normal level. If the company's accounts payable turnover rate is lower than the industry average, it means that the company can occupy more of the supplier's payment than its peers, indicating its important market position, but it must also bear more pressure on repayment, and vice versa; if The company's accounts payable turnover rate has increased rapidly compared with the previous period, which indicates that the company's reduction in the payment of suppliers' goods may reflect the increase in the upstream supplier's negotiation strength and the requirement for fast payment, and it may also indicate that the supply of raw materials is tight or even tight, and vice versa.

Similar to the accounts receivable turnover rate, this number will tell you how many days the company takes on average to cash a check issued to the seller. You can get this data in the same way, by dividing the total purchase amount by the current payable amount. For example, your annual purchase is $ 300,000 and you now owe the seller $ 50,000, so your payables turnover rate is 6 times a year. If you divide this number by 365, the result is 61, which means that you generally pay 61 days after receiving the bill.

This is an issue that requires close attention because you need seller credit as a source of low or no cost financing. In addition, the deterioration of the accounts payable turnover rate may be a symptom of a cash crisis and endanger the relationship between the two. Therefore, the goal should be to make the accounts receivable turnover rate and accounts payable turnover rate as close as possible, so that the cash inflow and cash outflow can be offset.