What is the ratio of account turnover?

The ratio of account payments usually measures how many times the company pays to its suppliers during a specific accounting period. It usually determines the company's ability to manage and pay their obligations to suppliers. The ratio usually gives investors an idea of ​​how quickly the company can settle its accounts. This helps investors to understand liquidity, as suppliers often require payment within 30-90 days. Payments requirements will usually differ from the supplier to the supplier, depending on its size and financial abilities. A lower ratio usually means that the company is slowly paying to its suppliers; Conversely, a higher ratio means faster settlement of supplier debts. Because it may be a difficulty to determine the actual amount of purchases made on a loan is usually assumed that all purchases are carried out on a loan. This is in accordance with the principle of conservatism in accounting, in which one predicts losses and recognizes profits only after it has been held.

further, if the average payments are not listed, it will be necessary to calculate them. This is achieved by adding accounts due starts and payable ends of accounts and then the amount divided by two. Finally, credit purchases should be divided by average accounts due to obtain a turnover ratio of payable accounts.

For example, if annual purchases are $ 200,000 in US dollars (USD), the beginning of the payable accounts is $ 30,000 and the bills payable end balance is $ 20,000, so it would be calculated: 200 000 / ([30 000 + 20,000] / 2). The account turnover ratio would be eight. This is a number that investors would like to view.

In general, there are two reasons for a slower or declining ratio of payable accounts: either business has a lack of cash, or there could be disputes over invoices handed over to the supplier, resulting in slower payments. If the company does not pay its obligations immediately, then it could mean that it cannot pay its creditors. That wouldIt could mean that the company wants to extend the payment of obligations as long as it can.

The second consequence of a low ratio of due turn means that the company is successful and has a good credit policy from its suppliers. This good credit policy usually allows companies to have favorable credit conditions that allow it to use or invest cash in other businesses. For example, if suppliers require payment every six months, the company may invest its earnings for six months before the payment.