Payables turnover

Payables turnover
See also


The payables turnover ratio is the number of times, on average, that accounts payable turn over during the year [1] ,i.e. that a company pays its accounts payable during the accounting period. This ratio reflects the relative size of accounts payable, a company’s urgency in paying suppliers and the credit terms offered by suppliers [2].

Ratio Analysis[edit]

The payables turnover ratio is one of the ratios needed in financial statement analysis, which is based on the computing and interpreting different ratios. Using them, the relations between particular items of financial statements are presented. These indicators are useful in assessing the financial situation, serving as a benchmark for comparing the company's results with the results of competitors, which allows the company's performance to be assessed [3].

Using indicators, it is possible evaluate[4]:

  • Return on investment,
  • Risk,
  • Financial flexibility,
  • Liquidity,
  • Operating capability.

Payables turnover ratio belongs to the group of Operating capability ratios. These ratios are used to measure the company’s efficiency to use its economic resources to be able to generate revenues[5].

How to calculate the payables turnover ratio?[edit]

The formula is:

Accounts payable turnover = Inventory Purchases* / Average accounts payable

Inventory Purchases = Cost of Goods Sold + Change in Inventory

Example[edit]

Company X’s cost of goods sold in 2015 year was USD 110,550, and its inventory decreased by USD 8,000. Accounts payable at the beginning and end of the year were, respectively, USD 12,695 and USD 26,985. The company wants to measure how many times it paid its creditors over the fiscal year.

Accounts payable turnover = Inventory Purchases / Average accounts payable

Inventory Purchases = 110,550 – 8,000 = 102,555 Average accounts payable = (12,695 + 26,985)/2 = 19,840

Accounts payable turnover = 102,555 / 19,840 = 5.17

Therefore, over the fiscal year, the company’s accounts payable turned over approximately 5.17 times during the year.

Having accounts payable turnover, it is possible to calculate Accounts Payable Turnover in Days:

Accounts Payable Turnover in Days = 365 / Accounts payable turnover

Accounts Payable Turnover in Days = 365 / 5.17 = 70.59

Therefore, over the fiscal year, the company takes approximately 70.59 days to pay its suppliers.

What does the payables turnover ratio result mean?[edit]

Depending on the result, the indicator can inform about [6][7]:

  • Too high turnover may inform that company is losing the “free” credit provided by account payable, because of making payments too quickly.
  • Too low turnover (than the average for its industry) may indicate that the company is having financial difficulties.
  • High result of payables turnover ratio means that the company does not need a lot of time between the purchase of inventory and the cash payment.

Footnotes[edit]

  1. L. Nikolai, J. Bazley, J. Jefferson, 2010, p. 284
  2. B. Needles, M. Powers, 2010, p. 365
  3. J. Wahlen, J. Jones, D. Pagach, 2012, p. 438
  4. J. Wahlen, J. Jones, D. Pagach, 2012, p. 438
  5. J. Wahlen, J. Jones, D. Pagache, 2012, p. 442
  6. J. Wahlen, J. Jones, D. Pagach, 2012, p. 444
  7. L. Nikolai, J. Bazley, J. Jefferson, 2010, p. 284

References[edit]

Author: Katarzyna Skrzyniarz