Payables Turnover Ratio Calculator
Account Payable Turnover Ratio Formula
Payable Turnover Ratio =
Total supplier purchases / Average Accounts Payable
Average Accounts Payable is calculated by the following:
((Beginning Accounts Payable + Ending Accounts Payable) / 2)
What is Payables Turnover Ratio?
The Payable Turnover Ratio is used in accounting to determine how well a company is paying its suppliers. It is a measure of short-term liquidity. To calculate this ratio, take the cost of sales (total supplier purchases), and divide by the average accounts payable. Keep in mind that the same period must be evaluated when completing this calculation.
Accounts Payable Turnover Ratio is calculated with total supplier purchases and the average of accounts payable. Divide the cost of sales by average accounts payable. This ratio tells investors how many times, on average, a company pays its accounts payable per a period. Accounts payables are a companys short-term obligation to debt and it is located on the Balance Sheet. It is listed as a current liability. When the payables turnover ratio decreases over time, it means the company is taking longer to pay supplier debts. Conversely, if the ratio is increasing over time the company is paying its debts more quickly. This ratio is an indication of not only how the company is doing financially, but how well it pays its debt responsibilities.
Payables Turnover Sample Problem
Shoeburger Corp made total supplier purchases of $400,000 during a given year. On January 1st Shoeburger Corp had $40,000 in accounts payable and on December 31 (of the same year) they had $36,000 in accounts payable. Given this information, we can calculate the accounts payable turnover ratio for the specified year.
First, determine the Average Accounts Payable:
($40,000 + $36,000) / 2 = $38,000
Next, we can calculate the payables turnover ratio, as follows:
$400,000 / $38,000 = 10.53
With this information, we determine that Shoeburger Corps average payables turnover is 10.53 times per year. To further determine what this means in days, we take the number of days in a year and divide by the average accounts payable turnover; 365 / 10.53 = 34.66 days. So, on average it takes Shoeburger 35 days (rounding 34.66 up) days to pay the money that is owed to their suppliers. Shoeburger may want to evaluate if they are paying late fees, as most suppliers have N30 (net 30 day terms) and want their money in 30 days, and based on this Shoeburger would be late.