Accounts Payable Turnover (Times)
Accounts Payable Turnover (Times) – an activity ratio measuring how many times per year the company pays its average debt to suppliers (creditors). By comparing accounts payable turnover and accounts receivable turnover one can understand the quality of company’s credit policy. Excess of the accounts payable over the accounts receivable means that the company uses creditors' funds as a source of financing its clients and other debtors, and part of the money is being used by a firm for financing its operations. The ratio can be computed by dividing the cost of goods sold by average accounts payable. The result of the computation reflects the number of the accounts payable turns during the analyzed period.
Normative values for the inventory turnover (times) highly depend on the industry. Should be remembered that they still may vary even for enterprises within one industry. That's why it is better to compare the current speed of the company's accounts payable processing with its main competitors. Also, it would be useful to analyze the dynamics of the ratio and evaluate its changes during the analyzed period.
Should be mentioned that the excessively high or low accounts payable turnover value may have a few consequences. Some authors state that a decreasing trend of this ratio is a good sign since the company has the possibility to finance its activity from the free source of finance - funds of creditors and suppliers. But this statement isn't always correct. In case of constant payment delays, creditors and suppliers will include the risk to the price of their goods. That's why low accounts payable turnover may have negative medium term consequences. However, if this isn't happening the company is interested in maintaining the low accounts payable turnover.
Resolving the problems with the accounts payable turnover exceeding the normative range:
When making conclusions on the accounts payable turnover values analysis the current situation should necessarily be taken into account. For the development of good relationships with suppliers it is important to improve the company's payment history. If the firm is an important client, and the suppliers do not have any penalty charging tools for the long-term usage of their funds, the company can continue using these funds.
Accounts payable turnover (Times) = Cost of goods sold ÷ Average accounts payable
Accounts payable turnover = Purchases ÷ Average accounts payable
Accounts payable turnover (Times) (Year 1) = 3351÷ 627 = 5,3
Accounts payable turnover (Times) (Year 2) = 3854 ÷ 834 = 4,6
The decline of the accounts payable turnover ratio in year 2 comparing to year 1 means that the firm has decreased its ability to pay its debt to its suppliers (creditors). In year 1 it was averagely paying its debt 5,3 times per year, while in year 2 it was done 4,6 times. This creates a risk of deterioration in relationships with suppliers for company analyzed, and can lead to the supplies cost increase (in case suppliers decide to increase the cost of their goods or services due to the payment delay risk).
Accounts Payable Turnover (Times) helps an analyst to get an insight into the efficency of the firm's approach to the accounts payable. Optimal is a stable trend of the accounts payable turnover ratio, because this makes the company's performance predictable, and thus reliable for its suppliers and other creditors. For a company delaying the payment as long as possible, yet still proceeding it by the due date, is desirable and indicates the efficient use of funds.