Creditors / Accounts Payable Turnover Ratio
The Account payable turnover ratio ( A/P Turnover ratio ) or Creditors turnover ratio is basically a short term Liquidity.
This type of turnover ratio shows , tells or quantify and measure the rate at which Company Paysoff its supplier or vendors. This turnover ratio quantify a Comapany Ability to paysoff its supplier or vendor by comparing its Net purchases to average Account payable during the period . In simple words the Account payable turnover ratio shows that how many time a year a company can paysoff its supplier and vendors or Account payable turnover ratio shows or measure the speed with which the company pays off its Account payables.
This ratio helps the creditors to analyse the Company liquidity by the analysing the rate at which the companys paysoff its supplier and vendors . Companies that quickly or frequently pays off its supplier or creditors shows to the creditors that they will be able to make regular and handsome amount of interest. A higher Account payable turnover ratio put a positive image of the company on the creditor Or supplier .And a lower Account payable turnover ratio put a negative image of the company On the supplier and vendor that the company does not regularly or frequently pays off its account payables. If the Account payable turnover ratio of the company declines from One year to next year this means that the company is paying its creditors or supplier with much slower speed and this result in negative impression of the company
This ratio can be calculated by dividing the total Purchases of the company by its average Account payables.
Account payable turnover ratio = Total purchases / Average Account payable
For example the Manager of the XYZ companys wants to calculate or find out the account Payable turnover ratio or creditors turnover ratio for Past year . In the starting of this year the beginning Account payable Balance was $900000 and the ending balance Of Account payable is $994000. Purchases of the company for last twelve months are 8500000 ?
Account Payable turnover ratio = 8500000/947000
= 8.9 account payable turnover
This means that XYZ’s comapany account payables turned over 8.9 times during the past Year.
Now the Manager of the company XYZ wants to calculate the account payable turnover ratio Or creditors ratio in days :
The manager of the company XYZ divides the 8.9 turns into 365 days , which results in
= 365 days /8.9 turns
= 41 days
Companies sometimes calculate the accounts payable turnover ratio by only applying the cost of goods sold in the numerator. This is not the proper way , since there may be a large amount of administrative expenses that should also be included in the numerator. If companies or firms only apply cost of goods in numenator this will result in high value of turnover ratio. An incorrectly high turnover ratio can also be resulted if cash-on-delivery payments made to vendors are included in the ratio, since these payments are outstanding for zero days.
November 14, 2018