Accounts Payable Turnover Ratio

What it is

The accounts payable (AP) turnover ratio measures how quickly a company pays its suppliers. It indicates how many times during a period a company pays off its accounts payable and is a short-term liquidity and efficiency metric.

Accounts payable appears on the balance sheet under current liabilities.

Formula and calculation

AP turnover = Total supplier purchases ÷ Average accounts payable

Average accounts payable = (Beginning accounts payable + Ending accounts payable) ÷ 2

Calculation steps:
1. Add beginning and ending accounts payable and divide by two to get the average AP for the period.
2. Divide total supplier purchases (or cost of goods purchased) for the period by the average AP.

Example

Company A
– Total supplier purchases: $100 million
– Beginning AP: $30 million
– Ending AP: $50 million
– Average AP = ($30M + $50M) / 2 = $40M
– AP turnover = $100M / $40M = 2.5 (paid suppliers 2.5 times during the year)

Company B
– Total supplier purchases: $110 million
– Beginning AP: $15 million
– Ending AP: $20 million
– Average AP = ($15M + $20M) / 2 = $17.5M
– AP turnover = $110M / $17.5M ≈ 6.29 (paid suppliers ≈6.29 times during the year)

An investor comparing these two companies would note that Company B pays suppliers more frequently than Company A, but should review trends and other financial ratios before drawing conclusions.

What it indicates

• Higher AP turnover: the company pays suppliers faster, suggesting good short-term liquidity and strong cash availability. However, consistently high turnover could mean the company is not leveraging credit terms or reinvesting cash into growth.
• Lower AP turnover: the company takes longer to pay suppliers. This can signal cash constraints or financial distress, but it can also result from negotiated extended payment terms with suppliers.

AP vs. AR turnover

• Accounts payable turnover measures how quickly a company pays its suppliers.
• Accounts receivable (AR) turnover measures how quickly a company collects cash from customers.
  Both metrics together provide insight into working capital management and cash conversion efficiency.

Limitations

• Industry differences matter: acceptable AP turnover varies by industry and business model. Compare companies within the same industry.
• A single AP turnover figure is not definitive; analyze trends over time and use alongside other ratios and financial statements to understand causes and implications.
• High or low ratios may reflect strategic decisions (e.g., taking discounts, negotiating terms) rather than financial weakness.

What is a “good” AP turnover ratio?

A commonly cited benchmark is roughly 6–10, but this varies widely by industry. Use industry peers as the most relevant comparison.

How to improve AP turnover

• Strengthen cash flow (better collections, inventory management, cost control).
• Negotiate favorable payment terms with suppliers (longer terms or early payment discounts).
• Prioritize and schedule payments to optimize cash use.
• Implement automated accounts payable processes to reduce delays and take advantage of discounts.
• Consolidate suppliers or leverage volume to improve terms.

Key takeaways

• AP turnover = Total supplier purchases ÷ Average accounts payable.
• It reveals how often a company pays its suppliers and is a short-term liquidity indicator.
• Interpret the ratio in context: compare to industry peers, review trends, and combine with other financial metrics before making decisions.