Use as Key Performance indicator – KPIĪn accounts payable ratio can be an excellent key performance indicator to assess the performance of the cash management mechanism. However, it needs to be compared with the peer companies in the industry. Although, the frequency of the payment does not seem to be higher. The business paid 1.56 times during the past year as per calculation. Payable Turnover Ratio = USD70,000/ USD45,000 Advertisements Payable Turnover Ratio = Credit Purchases / Average accounts payable Let’s calculate the accounts payable turnover ratio with the formula. The credit purchases during the year amounted to USD70,000. ExampleĬonsider the business had payable outstanding on the opening of the year 2020 amounting to USD30,000 and closing at the year amounting to USD20,000. In other words, the proportion of the payable is more in comparison with the credit purchases. On the contrary, if the ratio is lower it indicates that payable is higher which has not been paid for a larger period. ![]() If the ratio is higher the company makes prompt payment to the creditors, it’s indicated by the lower accounts payable as most of the portion has been paid to the creditors in comparison with the purchases. The accounts payable turnover ratio is an activity ratio that measures how many times per year the company pays its average debt to suppliers. Payable Turnover Ratio = Credit Purchases / Average Account Payable Interpretation On the other hand, the suppliers might have reduced the credit terms for the business due to an increase in the demand for their products. Related article Why is Account Payable Current Liability? This might suggest that the company has enhanced the mechanism of cash management and the activities adversely affecting the liquidity position of the business. The increasing trend of the accounts payable suggests that the company is paying the suppliers more efficiently than the previous period. Increase in the account payable turnover ratio So, operational information needs to be considered in the appropriate interpretation of the ratio. ![]() On the other hand, the company may have negotiated the extended terms for the payments with the suppliers. The diminishing trend of the accounts payable flags that the company might be facing some monetary troubles and not able to pay for the debts falling due. ![]() Decrease in the accounts payable turnover ratio So, adequacy is not about paying fast it’s about paying on time. however not so rapidly that the business misses opportunities since they could utilize the cash and generate profit. The rapid payments of the accounts payable are considered to be ideal. The calculation can be of great importance to the suppliers as they can assess the credibility of the business in paying creditors before entering into a selling contract with them. It’s a widely used liquidity metric to get an idea about payment patterns and understanding of the business that is struggling to pay off for the creditors. It helps the business to understand the pattern of the payments and how they fast are in making payments to the creditors. An account payable turnover ratio helps to measure the time business takes to pay off the debt to the creditors.
0 Comments
Leave a Reply. |
Details
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |