4.28 : Activity Ratios: Accounts Payable Turnover Ratio

An accounts payable turnover ratio measures how efficiently a company pays its suppliers or creditors over a specific period.

The accounts payable turnover Ratio is calculated by dividing a company's total net credit purchases during a specific period by the average amount of accounts payable over that period.

The average accounts payable is the average of the opening balance of accounts payable and the closing balance of accounts payable.

Suppose Pixel Corporation has net credit purchases of nine hundred thousand dollars for the year, and the average accounts payable during that period is three hundred thousand dollars.

The Accounts Payable Turnover Ratio would be 3.

This ratio of 3 indicates that Pixel Corporation pays off its accounts payable three times during the year.

A higher ratio indicates that the company pays its creditors promptly, which can signal strong liquidity and good supplier relationships.

Alternatively, a lower ratio could indicate slower payments, potentially pointing to cash flow issues or weaker supplier relationships.

A balanced accounts payable turnover ratio helps ensure efficient financial management and smooth business operations.