Accounts Payable Turnover Ratio

A printable cheatsheet with calculations
and notes

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Accounts Payable Turnover Ratio

Accounts Payable Turnover Ratio =

Total supplier purchases

Average accounts payable

INTERPRETATION:

The accounts payable turnover ratio measures how quickly a business pays its creditors and suppliers.

It also shows the company’s ability to pay its short-term debts.

Note: expanded calculation

Divide the total purchases by the average accounts payable for the year. To calculate total purchases, add the ending inventory to the cost of goods sold and subtract the beginning inventory.

EXAMPLE

M&M company purchased $1,000,000 worth of construction materials from its suppliers. According to the balance sheet, the beginning accounts payable were $55,000, and the ending accounts payable were $958,000.

Accounts Payable Turnover Ratio = $1,000,000 / ($55,000 + $958,000/ 2) = 1.97

360 days /1.97 = 182.7 days or six months

A 1.97 ratio means that M&M pays their suppliers back on average once every six months or twice a year.

BENCHMARK: HA, PG, ROT

Generally, a higher payable turnover ratio is more favorable because it means a business pays off its debt more quickly.

Accounts Payable Turnover Ratio:

ABBREVIATION KEY:

ROT: Rule of thumb
HA: Historical Average (organization’s historical average)
PG: Peer Group average
EB: Economic Benchmark

DISCLAIMER: The interactive calculators on this site are self-help tools intended to help you visualize and explore your financial information. They are not intended to replace the advice of a qualified professional. Because each business is different, we can not guarantee accuracy.