Accounts Payable Turnover Ratio: Formula & How to Calculate

If your AP turnover for the same quarter is above 5.2, that would look better to creditors. However, it might also mean that your company pays its bills more quickly than you need to, tying up cash you could use in other ways. Your average AP balance is simply the average between your starting accounts payable balance and your ending accounts payable balance over what is the journal entry if a company pays dividends with cash a given time period. Getting the data you need is important, but accessing it quickly ensures you can spend your time analyzing the metrics and developing proactive strategies to move the business forward.

This article explores the accounts payable turnover ratio, provides several examples of its application, and compares the metric with several other financial ratios. Finally, the discussion explains how your business can improve your ratio value over time. The ratio serves as a measure of how effectively a company manages its cash flow. A high APTR suggests the business has sufficient cash reserves to pay suppliers payroll processing promptly, demonstrating strong financial management. On the other hand, a low ratio may highlight liquidity challenges or inconsistent cash flow, potentially affecting the company’s ability to cover operational expenses. By monitoring this metric, businesses can better plan their cash flow and avoid financial bottlenecks.

The Accounts Payable Turnover Ratio (APTR) is a key financial metric that measures how efficiently a business pays its suppliers within a specific period. Calculate the accounts payable turnover ratio formula by taking the total net credit purchases during a specific period and dividing that by the average accounts payable for that period. The average accounts payable is found by adding the beginning and ending accounts payable balances for that period of time and dividing it by two. The ratio measures how many times a company pays its average accounts payable balance during a specific timeframe. The ratio compares purchases on credit to the accounts payable, and the AP turnover ratio also measures how much cash is used to pay for purchases during a given period.

AP Turnover Ratio Formula & Calculator Tool

AI-driven invoice data capture reduces manual entry time and errors, enabling faster invoice approvals and payment processing—leading to quicker turnover of accounts payable. A high AP turnover ratio indicates fast payment cycles, strong liquidity, and disciplined management. While this fosters supplier trust, it could also mean you’re not fully leveraging available payment terms—possibly sacrificing working capital flexibility.

The difference between the AP turnover and AR turnover ratios

Track invoice status metrics — both amount and count — to keep track of the revenue coming in. Monitor expenses as a percentage of revenue to ensure you’re not overspending in any one area. And use Mosaic’s income statement dashboard to proactively monitor your AP turnover by summarizing your revenue and expenses during a certain period of time. You’ll see whether the business generates enough revenue to pay off debt in a timely manner.

In most industries, taking 250 days to pay would be considered slow payment.
The AP process involves receiving invoices, verifying their accuracy, and then making payments within agreed terms.
For example, a company with a ratio of 12 may be paying its suppliers monthly, which is ideal in industries with short payment cycles like retail or food services.
It can show cash is being used efficiently, favourable payment terms, and a sign of creditworthiness.
The formula can be modified to exclude cash payments to suppliers, since the numerator should include only purchases on credit from suppliers.
A solid accounts payable (AP) system ensures that payments are correct and made on time.

Falling Behind on AP Benchmarks? See Where the Industry’s Headed.

Nimble, high-growth companies rarely wait until the end of the year to conduct financial analyses. Instead, they make it a habit to track key metrics like cost of goods sold (COGS), liquidity ratios, high account balances, and more on a regular basis. Maybe you want to raise your AP turnover to get more favorable credit terms.

Treasury & Cash Management

A higher ratio shows suppliers and creditors that the company pays its bills frequently and regularly. A high turnover ratio can be used to negotiate favorable credit terms in the future. The accounts payables turnover ratio offers assumptions for calculating payables balances and supplier payment cash flows in financial models that forecast future performance. Your accounts payable turnover ratio tells you — and your vendors — how healthy your business is.

Tips to improve your accounts payable (AP) turnover ratio

A higher ratio suggests faster payments, while a lower ratio may indicate delayed payments or cash flow challenges. Calculating and tracking the accounts payable turnover ratio is important for a company because it provides insight into the company’s cash management and supplier relations. The ratio measures how quickly a company is paying its bills, and it can help a company identify potential problems with its accounts payable process. Tracking the accounts payable turnover ratio over time can help identify potential financial risks. A declining ratio may signal growing cash flow issues, rising debt levels, or difficulties in maintaining supplier payments. Addressing these risks early can prevent more significant problems, such as damaged supplier relationships or disruptions to production.

Accounts Payable (AP) Turnover Ratio and Accounts Receivable (AR) Turnover Ratio are both important financial metrics used to assess different aspects of a company’s financial performance. Regularly reviewing supplier agreements and payment behaviors helps ensure your AP practices are supporting—not hindering—your cost control and relationship management goals. They also promote strong communications between business finance and operations, which need to work together to make both strategic and tactical decisions.

A business that generates more cash inflows can pay for credit purchases faster, leading to a higher AP turnover ratio. A high accounts payable turnover ratio how much does a small business pay in taxes indicates better financial performance than a low ratio. A higher ratio is a strong signal of a company’s positive creditworthiness, as seen by prospective vendors. The accounts payable turnover ratio is a valuable tool for assessing cash flow decisions and how well businesses maintain vendor relationships. Comparing your ratio to industry benchmarks provides context and helps identify whether your payment practices align with industry standards.

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The accounts payable turnover ratio provides a clear picture of how well a company manages its payment obligations to suppliers.
Your business’s AP turnover ratio gives you insights into your payment practices and helps you identify areas for improvement.
A higher ratio shows suppliers and creditors that the company pays its bills frequently and regularly.
Here’s what you need to know about the accounts payable turnover ratio, including how to calculate it.
Moreover, the “Average Accounts Payable” equals the sum of the beginning of period and end of period carrying balances, divided by two.

As a result, investors should not accept a high or low ratio at face value. Instead, investors who see the AP turnover ratio might wish to look into the cause of it further. Given the A/P turnover ratio of 4.0x, we will now calculate the days payable outstanding (DPO) – or “accounts payable turnover in days” – from that starting point. The days payable outstanding (DPO) metric is closely related to the accounts payable turnover ratio. This may be due to favorable credit terms, or it may signal cash flow problems and hence, a worsening financial condition.

For instance, a business with a high ART but a low APTR may excel in collecting receivables but struggle with timely supplier payments, potentially causing cash flow imbalances. Ideally, both ratios should reflect efficient practices to maintain smooth operations. A high ratio suggests that a company is paying its suppliers promptly and frequently throughout the period. This can be a sign of strong cash flow management and good supplier relationships. However, an excessively high ratio might indicate the company is not fully utilizing available credit terms, which could limit its ability to preserve cash for other operational needs.

Automation can speed up your AP process, as well as keep you up-to-date on payments, due dates, and a centralized place for all your bills. This shows that having a high or low AP turnover ratio doesn’t always mean your turnover ratio is good or bad. When assessing your turnover ratio, keep in mind that a “normal” turnover ratio varies by industry. In certain instances, the numerator includes the cost of goods sold (COGS) instead of net credit purchases.

Company A reported annual purchases on credit of $123,555 and returns of $10,000 during the year ended December 31, 2017. Accounts payable at the beginning and end of the year were $12,555 and $25,121, respectively. The company wants to measure how many times it paid its creditors over the fiscal year. On-time payment rate measures the percentage of payments made to vendors on or before the due date. Cost per invoice processing calculates the average cost incurred to process a single invoice. It includes all direct and indirect costs related to invoice processing, such as labor, software, and overheads.

For example, accounts receivable balances are converted into cash when customers pay invoices. When you purchase something from a vendor with the agreement to pay for the purchase later, you make an entry into your accounting system debiting an expense and crediting accounts payable. But in the case of the A/P turnover, whether a company’s high or low turnover ratio should be interpreted positively or negatively depends entirely on the underlying cause. As part of the normal course of business, companies are often provided short-term lines of credit from creditors, namely suppliers.