Harness Money

What is accounts payable turnover ratio?

The accounts payable turnover ratio is a financial metric that measures the efficiency with which a company pays its suppliers and manages its accounts payable. It provides insights into how quickly a company settles its outstanding obligations to suppliers.

To calculate the accounts payable turnover ratio, you need two pieces of information: the average accounts payable balance and the cost of goods sold (COGS). The formula is as follows:

Accounts Payable Turnover Ratio = COGS / Average Accounts Payable

The cost of goods sold (COGS) is typically found on the company’s income statement, while the average accounts payable can be calculated by adding the beginning and ending accounts payable balances and dividing by two.

A higher accounts payable turnover ratio indicates that a company is paying its suppliers more frequently and efficiently, which can be a positive sign of strong financial management.

However, an extremely high ratio may suggest that a company is taking longer to pay its suppliers, potentially straining supplier relationships. Comparing the ratio to industry benchmarks and historical trends can provide further context for evaluation.