Accounts payable turnover ratio - Definition, formula, and analysis

The accounts payable turnover ratio is a metric that is used to measure the rate at which a business is able to send out payments to suppliers and creditors that extend lines of credit.

The ratio is quantified by accounting professionals by calculating, over a specific period of time, the average number of times a company pays its accounts payable balances.

The accounts payable turnover ratio is an important indicator of a company’s ability to manage cash flow and its liquidity on a balance sheet.

Bookkeepers should be tracking the AP turnover ratio as an aspect of managing accounts payable to identify issues related to payment.

Similarly, the accounts payable turnover ratio can be used by creditors as a way of evaluating the vendor payment history of a company.

High accounts payable ratio: A higher accounts payable ratio signifies that the organization in question is taking a shorter amount of time to pay its bills than those with a lower ratio.

Low accounts payable ratio: While it is not always the case, Low accounts payable ratio could mean that the company might be struggling to pay its bills. A low AP ratio could also mean that the company is using its cash strategically.

Typically, a higher ratio is a benefit for businesses that rely on lines of credit because lenders and suppliers use this metric to determine the degree of risk that they are undertaking.

To calculate this metric you need to use the accounts payable turnover ratio formula, to do this follow the below steps:

The number of times you paid off your accounts payable balance during a certain period, such as monthly, annually, or quarterly, is what is signified by the accounts payable turnover ratio.

If you have an increasing or higher accounts payable turnover ratio it probably indicates that, in comparison with previous periods, you have been paying your bills faster.

On the other hand, an account payable turnover ratio that is decreasing could mean that your payment of bills has been slower than in previous periods.

The issue here is that the accounts payable turnover ratio cannot be used on its own to determine a business’s ability to pay its suppliers and vendors.

It can, however, serve as a signifier that you need to look into why your company has a low or a high ratio.

For instance, a high ratio doesn’t always mean a good thing because it could also be an indicator of the fact that because of negative payment history you have very short payment terms with vendors.

You should also take into consideration the accounts payable turnover ratio industry average for the industry you work in.

Ratios that are good for a grocery retail chain might not have the same meaning for a fashion retail brand. Compare your ratio with the industry average to get a better idea of where you stand.

Lastly, you must also take into account the trends in accounts payable turnover ratio over different periods of time.

You must also keep an eye on whether there are times during the year when your turnover ratio is consistently high or consistently low. If they are, you must further investigate.

These are all factors that lenders will take into account when considering you for a line of credit or loan.

A good accounts payable turnover ratio in days (DPO) is determined by benchmarking with your industry and your business.

Accounts payable turnover depends on your company’s payment timing policies and the average credit term days received from your vendors.

Policies must support good credit history, vendor relationships, and continuing inventory shipments from suppliers. Days payable outstanding (DPO) is basically the accounts payable turnover in days.

Based on the average number of days in the turnover period, DPO is a different view of the accounts payable turnover ratio formula. The DPO formula is calculated as the number of days in the measured period divided by the AP turnover ratio. 

The Days payable outstanding should relate reasonably to average credit payment terms stated in the number of days until the payment is due and any early payment discount rate offered.

Given below are some strategies you can use to improve your accounts payable turnover ratio:

Need a solution that can both maintain and help you streamline your accounts payable turnover ratio? Look no further. Volopay is the answer to all the accounts payable needs your business has.

With Volopay you get a comprehensive consolidated dashboard that is capable of managing accounts payable process completely.

Invoice processing, expense reporting, subscription payments, approval workflows, and even accounting integrations, all of these can be handled simultaneously by using Volopay.

The best part is that tasks happen in real-time and in an automated fashion. This means there’s little manual labor involved and you get constant visibility over cash flow.

By tracking your cash flow in real-time you can also make adjustments to accounts payables in real-time, therefore giving you the opportunity to improve the accounts payable turnover ratio quicker than you would otherwise be able to.

In conclusion, you can use Volopay to not only maintain your AP turnover ratio seamlessly but also a host of other processes associated with accounts payable.