10 julio, 2024

Turnover of accounts payable: formulas, calculation, examples

The accounts payable turnover It is a short-term liquidity indicator that is used to quantify the rate at which a company pays its suppliers. Accounts payable turnover shows the number of times a company settles its accounts payable during a period.

Accounts payable are short-term debts that a company owes to its suppliers and creditors. They are reflected in the current liabilities of the balance sheet. The accounts payable turnover indicator shows how efficient a company is in paying its suppliers and short-term debts.

Ideally, a company wants to generate enough revenue to quickly pay off its accounts payable, but not so quickly that the company misses out on opportunities, because that money could be used to invest in other endeavors.

Investors can use accounts payable turnover to determine whether a business has enough revenue or cash to meet its short-term obligations. Creditors can use the ratio to gauge whether they can extend a line of credit to the company.

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formulas

The formula to calculate the accounts payable turnover indicator in a given period is:

Accounts payable turnover indicator = Total purchases from suppliers / Average accounts payable.

To calculate the denominator of the previous formula, the following formula is used: Average accounts payable = (Accounts payable at the beginning of the period + Accounts payable at the end of the period) / 2.

Average accounts payable is used because accounts payable can vary throughout the year. The final balance may not be representative of the total year, therefore an average is used.

Turnover of accounts payable in days

Accounts Payable Turnover in Days shows the average number of days it takes to make a payment. To calculate this indicator, simply divide 365 days by the accounts payable turnover.

Accounts payable turnover in days = 365 / accounts payable turnover.

Turnover analysis

A decreasing turnover indicates that a company is taking longer to pay its suppliers than in previous periods. It could indicate that a company is in financial difficulty.

However, it could also represent that the company has negotiated better payment arrangements with its suppliers.

When turnover increases, the company is paying suppliers at a faster rate than in previous periods. This means that you have enough cash on hand to pay off short-term debt in a timely manner, effectively managing your debts.

However, it could also indicate that the company is not reinvesting in its business, resulting in a lower growth rate and lower profits in the long run.

How is it calculated?

First, the average accounts payable for the period is calculated by subtracting the accounts payable balance at the beginning of the period from the accounts payable balance at the end of the period. This result obtained is divided by two, in order to arrive at the average accounts payable in the period.

Second, the total purchases made from the supplier for the period in question are taken, and divided by the average accounts payable for the period calculated above.

Total purchases from suppliers are generally not available on any general purpose financial statement. Most companies will have a record of vendor purchases, so this calculation may not be necessary.

Observations on the calculation

The formula can be modified to exclude cash cash payments to suppliers, since the numerator should include only credit purchases from suppliers.

However, the amount of advance payments to providers is usually so small that this modification is not necessary. It may be necessary to exclude cash payment if a company has been so slow to pay suppliers that they now require you to pay in advance.

Companies sometimes measure accounts payable turnover using only cost of goods sold as the numerator. This is incorrect, as there may be a large amount of administrative expenses that must also be included in the numerator.

If a company only uses cost of goods sold in the numerator, this can create excessively high turnover.

examples

Company A

Company A purchases its materials and inventory from a supplier. During the year the following results were obtained:

– Total purchases from suppliers: $100 million.

– Accounts payable at the beginning of the year: $30 million.

– Accounts payable at the end of the year: $50 million.

Taking these values ​​into account, the average accounts payable of company A for the entire year is calculated:

Average annual accounts payable = ($30 million + $50 million) / 2) = $40 million.

Thus, the annual turnover of accounts payable is calculated as follows: $100 million / $40 million, equivalent to 2.5 times. That is, company A settled its accounts payable 2.5 times in the year.

To determine the turnover of accounts payable in days for Company A, we have:

Turnover of accounts payable in days = 365 / 2.5= 146.

Therefore, during the fiscal year, company A takes approximately 146 days to pay its suppliers.

B Company

Suppose that during the same year Company B, a competitor of Company A, had the following results:

– Total purchases from suppliers: $110 million.

– Accounts payable at the beginning of the year: $15 million, and at the end of the year: $20 million.

Taking these values ​​into account, company B’s average accounts payable is calculated: ($15 million + $20 million) / 2 = $17.5 million.

Thus, the turnover of accounts payable is calculated: $110 million / $17.5 million, equivalent to 6.3. That is, Company B settled its accounts payable 6.3 times during the year.

To determine the turnover of accounts payable in days for Company B, we have: Turnover of accounts payable in days = 365 / 6.3 = 58.

Therefore, during the fiscal year, company B takes approximately 58 days to pay its suppliers.

Compared to Company A, Company B is paying its vendors at a much faster rate, in fewer days.

References

Will Kenton AND CHRIS B. MURPHY (2019). Accounts Payable Turnover Ratio Definition. Taken from: investopedia.com. IFC (2019). What is the Accounts Payable Turnover Ratio? Taken from: corporatefinanceinstitute.com. Steven Bragg (2019). Accounts payable turnover ratio. Accounting Tools. Taken from: accountingtools.com. My Accounting Course (2019). Accounts Payable Turnover Ratio. Taken from: myaccountingcourse.com. James Wilkinson (2013). Accounts Payable Turnover Analysis. The Strategic CFO. Taken from: strategiccfo.com.

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