The accounts payable turnover ratio measures how many times a business pays off its accounts payable over a specific period, typically a fiscal year. It serves as a short-term liquidity indicator, showing the rate at which a business settles its obligations to creditors during a given timeframe.
This ratio is calculated by dividing net credit purchases for the period by the average accounts payable or average creditors for that same period. This ratio is important when evaluating financial health, particularly when establishing new business relationships. A high accounts payable turnover ratio indicates timely payments, while a low ratio may suggest financial difficulties or delays in honoring payments on time.
Net credit purchases refer to total purchases minus any purchase returns. Average accounts payable are calculated by adding the accounts payable at the beginning of the period to the accounts payable at the end of the period and dividing the sum by two.
Maintaining an optimal account payable turnover ratio is essential for efficient financial management and smooth business operations.
