Accounts Payable (AP) Turnover

What is Accounts Payable (AP) Turnover

Accounts payable (AP) turnover is a financial metric used to measure the rate at which a company pays its invoices and other accounts payable. It is a measure of how efficiently a company is managing its accounts payable and the speed at which it is paying its suppliers. The formula for AP turnover is calculated by dividing the total amount of accounts payable paid during a period of time by the average amount of accounts payable outstanding during that same period.

Why Accounts Payable (AP) Turnover is Important

The accounts payable turnover ratio is an important metric for businesses of all sizes. It provides insight into how quickly a company is paying its bills and indicates how effectively it is managing its accounts payable. Additionally, the AP turnover ratio can provide a better understanding of how the business is managing its cash flow. A high AP turnover ratio indicates that the company is paying its suppliers quickly and efficiently, whereas a low AP turnover ratio could indicate that the company is taking too long to pay its bills or is not managing its accounts payable effectively.

How Accounts Payable (AP) Turnover is Calculated

The formula for calculating the accounts payable turnover ratio is:

Accounts Payable Turnover Ratio = Total Accounts Payable Paid / Average Accounts Payable Outstanding

The total accounts payable paid is the amount of money that the company has paid out on accounts payable during the given period of time. The average accounts payable outstanding is calculated by adding the accounts payable at the beginning of the period and the accounts payable at the end of the period and dividing the sum by two.

For example, if a company has accounts payable of $100,000 at the beginning of the period and accounts payable of $120,000 at the end of the period, the average accounts payable outstanding would be ($100,000 + $120,000)/2 = $110,000. If the company paid out $80,000 on accounts payable during the period, the AP turnover ratio would be calculated as follows:

AP Turnover Ratio = $80,000/$110,000 = 0.73

How to Improve Accounts Payable (AP) Turnover

There are several ways to improve the AP turnover ratio, such as:

• Negotiating better payment terms with suppliers

• Adopting an automated accounts payable system

• Utilizing a centralized accounts payable system

• Setting up an automated payment system

• Centralizing payments

• Utilizing a vendor management system

Why Investors Value Low Accounts Payable (AP) Turnover

Investors value companies with a low AP turnover ratio because it indicates that the company is managing its accounts payable effectively and is able to pay its suppliers quickly. This can lead to improved cash flow and better relationships with suppliers, both of which can help improve the company’s overall performance.

How Accounts Payable (AP) Turnover Relates to Other Financial Metrics

The AP turnover ratio is related to other financial metrics such as working capital, current ratio, debt to equity ratio, and return on assets. A high AP turnover ratio indicates that the company is managing its accounts payable efficiently, which can lead to improved working capital and a higher current ratio. Additionally, a low AP turnover ratio can indicate that the company is taking too long to pay its suppliers, which can lead to an increased debt to equity ratio and a lower return on assets.

Sources

• Investopedia. "Accounts Payable Turnover Ratio." Investopedia. https://www.investopedia.com/terms/a/accounts-payable-turnover-ratio.asp

• AccountingTools. "Accounts Payable Turnover Ratio." AccountingTools. https://www.accountingtools.com/articles/what-is-the-accounts-payable-turnover-ratio.html

• Jaxworks. "Accounts Payable Turnover Ratio." Jaxworks. http://www.jaxworks.com/financial/accountspayable.htm