![]() ![]() Investors might use this ratio to see whether a company has sufficient cash to meet its short-term debts. This is an important ratio for the creditors because it helps determine whether they can extend the line of credit to the company. If the company is paying its suppliers quickly, it can show that either the company is taking advantage of early payment discounts offered by suppliers or the suppliers are demanding fast payments. When this turnover ratio reduces from one period to another, it shows the company is paying its suppliers slowly and might be an indicator of worsening financial conditions. ![]() It's a leading financial and efficiency ratio that helps assess a company's ability to manage its cash flows and pay its trade credit accounts. The accounts payable turnover ratio measures how quickly a business can repay money to its suppliers and creditors. What is the accounts payable turnover ratio? In this article, we explain what the AP turnover ratio is, review what it indicates, provide a list of steps you can take to learn how to calculate the AP turnover ratio, explain how it differs from the accounts receivable (AR) turnover ratio, and provide an example. Learning the definition and what this ratio shows can help you better manage a business and contribute to organizational improvements. One such metric that an accounts payable (AP) employee calculates, monitors, and tracks is the accounts payable turnover ratio. Conversely, if the industry average is lower, say 6, it could indicate that Fresh Bakery is more efficient in managing its cash flow and maintaining good relationships with suppliers by making timely payments.An accounting professional uses various financial metrics to understand the financial health of a company. If the industry average is around 8, then the company’s ratio of 7.2 is slightly lower, which might indicate slower payments to suppliers compared to competitors. To put this number into context, Fresh Bakery should compare its Accounts Payable Turnover Ratio with industry benchmarks or its historical performance. The Accounts Payable Turnover Ratio for Fresh Bakery is approximately 7.2, which means that the company pays its suppliers about 7.2 times per year on average, or roughly once every 50 days (365 days / 7.2). Now, let’s calculate the Accounts Payable Turnover Ratio: ![]() = (Beginning Accounts Payable + Ending Accounts Payable) / 2.Ending Accounts Payable for the year: $150,000įirst, let’s calculate the Average Accounts Payable:.Beginning Accounts Payable for the year: $100,000.Cost of Goods Sold (COGS) for the year: $900,000.Here’s the financial data for Fresh Bakery: We’ll use the Accounts Payable Turnover Ratio to evaluate the company’s efficiency in managing its accounts payable. Let’s consider a fictional company called “Fresh Bakery,” which specializes in producing and selling freshly baked goods. Example of an Accounts Payable Turnover Ratio Comparing the ratio to industry benchmarks or the company’s historical data can provide insights into the company’s cash flow management and competitiveness within the industry. When analyzing the Accounts Payable Turnover Ratio, it’s important to consider industry norms and the company’s historical performance. It can be calculated as (Beginning Accounts Payable + Ending Accounts Payable) / 2. Average Accounts Payable is the average balance of accounts payable during the accounting period.Cost of Goods Sold (COGS) is the total cost of producing or purchasing the goods sold by the company during the accounting period.The formula for calculating the Accounts Payable Turnover Ratio is:Īccounts Payable Turnover Ratio = Cost of Goods Sold (COGS) / Average Accounts Payable A higher ratio indicates that the company pays its suppliers more frequently, while a lower ratio suggests it takes longer to pay its bills. This ratio helps assess the efficiency of a company’s cash flow management and its ability to meet short-term obligations, as well as its relationships with suppliers. Accounts Payable Turnover Ratio is a financial metric that measures how frequently a company pays its suppliers within a specific period. ![]()
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