What is the Accounts Payable Turnover Ratio?
- 09 Jun 2022
- AP Automation
Understanding the accounts payable turnover ratio for an organization reveals its financial health. As a result, it is crucial to know how long it takes to pay invoices and why. Defining the AP turnover ratio also helps determine the creditworthiness of a business. After all, making timely payments to suppliers ensures continued production and builds a strong brand reputation.
Factors such as cash flow and accounts payable best practices influence the time it takes to pay invoices. Some companies take longer to pay to use the cash flow for investments, while others take advantage of discounts for early payments to suppliers. Often these decisions are based on the current market. Find out more about the accounts payable turnover ratio and what it means to the overall profitability.
So, what is the accounts payable turnover ratio?
The accounts payable turnover ratio is the time it takes a company to make payments to its suppliers that extend lines of credit. However, this does not include cash. As a result, the AP turnover ratio is a key indicator of creditworthiness based on an organization’s payment history.
The accounts payable turnover ratio is calculated by figuring out the average number of times a company pays its AP balances during a specific time. The formula for calculating the AP turnover ratio is Accounts Payable Turnover Ratio = Net Credit Purchases/Average Accounts Payable.
Is higher accounts payable turnover better?
Often management questions whether a higher accounts payable turnover is better as it shows the company’s ability to pay its short-term obligations. For example, the higher the accounts payable turnover ratio, the faster the organization pays off its debts to suppliers that extend business credit lines. On the other hand, the lower the AP turnover ratio, the slower the company pays off such debts.
Some companies need short-term liquidity and cash flow for investments, leading to higher AP turnover rates. Conversely, others discover the advantages of negotiating discounts for early payments with suppliers, such as improved supplier relationships and a better brand image. AP automation plays a critical role in streamlining AP workflows, providing transparency and visibility throughout the process to analyze accounts payable turnover best. Additionally, AP automation increases efficiency and offers real-time insights to make crucial decisions to reduce costs.
What factors affect the accounts payable turnover ratio?
Cash flow accessibility affects the accounts payable turnover ratio. For example, the number of times an organization pays its creditors is based on the need for cash to cover other expenses or investments during the same period. Additionally, a high ratio may exist due to suppliers requiring fast payment or the creditworthiness of an organization.
AP automation helps organizations gain greater control over cash flow to maximize all possibilities. For example, suppliers are often willing to negotiate discounts for early payments when an organization establishes timely payments. As a result, companies use cash management to decrease production costs and time - helping to gain an edge over the competition.
How can accounts payable turnover be improved?
Accounts payable benchmarks are another way for organizations to see how they stand up compared to others. Automation gauges AP department workflows, providing real-time access to relevant financial data to make crucial decisions about suppliers, contracts, and terms when it matters most. The team works in a secure and collaborative cloud environment to avoid business interruptions regardless of external events.
Also, automation provides transparency and visibility into daily operations to quickly detect inconsistencies, late payments, and fraud. As a result, companies save money and improve supplier relationships through enhanced communication and timely payments. As a result, companies stay on or ahead of production schedules to meet or exceed consumer expectations.
When considering the accounts payable turnover ratio, keep cash flow and savings requirements in mind. The goals are to boost efficiency and increase profits. AP automation provides real-time financial data to make critical decisions based on facts rather than estimation.
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