Accounts payable turnover ratio: formula, decrease and increase

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

At present, any educated person knows that every firm, organization or enterprise operates with a variety of economic and banking terms, which, in turn, can be quite specific for a simple layman. The article below will help you understand one of these definitions. In particular, thoroughly study what the accounts payable turnover ratio is.

Terminology

To begin with, let's figure out what the concept of turnover is. A similar term is a financial indicator that takes into account the intensity of the use of any specific funds, assets or liabilities. In other words, it allows you to calculate the speed of one cycle. Such a coefficient can be considered one of the parameters of the business and economic activity of the enterprise in question. In turn, the accounts payable turnover ratio shows how much money the company is obliged to reimburse the creditor organization by the appointed date, as well as the amount that will be required to make all the necessary purchases. Thus, we can conclude that the accounts payable turnover ratio allows you to determine the number of cycles for full payments on presented invoices. It should also be taken into account that the supplier of some products can also act as a creditor.

Calculation of the indicator

The accounts payable turnover ratio (formula) is as follows: this is the ratio of the cost of goods sold to the average value of loan obligations. The term cost can mean the total amount of costs for the production of a particular product for the year. In turn, the average debt is defined as the sum of the values of the desired indicators at the beginning and end of the period under review, divided in half. However, a more detailed calculation and study of all the changes that occur is also possible.

Second method

Another option for calculating such an indicator as the accounts payable turnover ratio has become quite widespread. With this method, it is possible to determinethe average number of days it takes for the organization in question to pay off all of its debts. A similar option of the parameter is called the period of collection of accounts payable. It is calculated according to the following formula: the ratio of the average debt to the cost of goods sold, multiplied by the number of days in a year, namely 365 days.

However, it should be taken into account that when conducting an analysis based on reports for any other periods, it is necessary to adjust the value of the product cost accordingly. As a result of such calculations, you can find out the average number of days during which the services of suppliers are considered unpaid.

Value fluctuations: increase

When examining the performance of an enterprise, it must be taken into account that the accounts payable turnover ratio largely depends on the scale of production, as well as on the scope and industry of activity. For example, for organizations providing cash loans, the most preferable is the high value of the indicator in question.

However, for companies that are provided with such assistance, conditions are considered more favorable, allowing them to have a lower value of the desired parameter. The described circumstance makes it possible to have some margin in the form of a balance of unpaid obligations.as a source of free replenishment of financial accounts for the implementation of normal work. An increase in the accounts payable turnover ratio leads to the fastest mutual settlement with all suppliers. This type of obligation is a kind of short-term free loan, therefore, the longer the time for repayment of funds is delayed, the more favorable the situation for the company is considered, since it provides the opportunity to use other people's finances. If the turnover ratio of accounts payable has increased, then we can talk about some improvement in the state of the organization's paying capacity in relation to suppliers of raw materials, products and goods, as well as extra-budgetary, budgetary funds and employees of the company.

Variations in values: decrease

Decrease in the accounts payable turnover ratio can lead to some of the peculiarities described below.

1. Difficulties with payments on presented invoices.

2. Possible restructuring of relationships with suppliers to provide a more favorable payment schedule. Thus, if the turnover ratio of accounts payable has decreased, then we can talk about both the benefit for the enterprise on the one hand, and the alleged loss of reputation on the other.

Analysis

Of course, when considering the turnover of accounts payable, it is also necessary to take into account the turnover ratio of receivablesobligations, because if you study only one of the two values presented, you can miss important data. This, in turn, can lead to an unfavorable situation for the organization as a whole, when the first of these indicators significantly exceeds the second. In addition, from the foregoing, we can conclude that the high value of accounts payable contributes to a decrease in both the solvency and the overall financial stability of the enterprise.

Benefit to the organization

If you take into account the share of accounts payable, then you can calculate the profit of the enterprise in a fairly simple way. The benefit lies in the value of the difference between the values of interest on loans (in the general case, it is taken equal to the amount of obligations of this type) for the period of stay of funds on the account of the organization and the amount of this very debt. In other words, we can say that the profit of the company in question is determined by the amount of financial resources saved due to the fact that there is no need to pay interest to banking structures for loans issued by them.

Positive factor

It can be assumed that the turnover ratio is a value that is inversely proportional to the value of the turnover rate. Thus, it turns out that the higher the cycle factor, the less time is needed for a complete revolution. Therefore, if the value of the turnover of accounts receivable is higher than the value of accounts payable, then it is considered thatthat the conditions for the further development of economic and entrepreneurial activities of the enterprise are positive and favorable.

Conclusion

From what has been said earlier, we can draw the following conclusions.

1. The value of the accounts payable turnover ratio depends as much as possible on both the scope of the organization and its scale.

2. For companies that provide loans, a high indicator is most preferable, and for organizations that need such payments, on the contrary, a lower value of the coefficient is beneficial.

3. In the process of analysis, one should take into account not only the turnover of accounts payable, but also the circulation of receivables.

4. Debt obligations include not only loan payments, but also wages to employees of the organization, payments to contractors, taxes, fees, relationships with extra-budgetary and budgetary funds.

5. For the favorable development of entrepreneurial and economic activities of the enterprise, it is necessary that the turnover ratio on loans largely exceed the value of the same indicator for receivables.