accounts payable turnover
A ratio measuring how quickly a company pays its suppliers, calculated by dividing total purchases by average accounts payable. Higher turnover means faster payment.
Example
“An AP turnover of 12 means the company paid its suppliers every 30 days on average.”
Memory Tip
AP TURNOVER = how fast you PAY your bills. Higher = paying faster. Lower = stretching payments.
Why It Matters
Understanding accounts payable turnover helps you evaluate whether a business is managing its supplier relationships efficiently and maintaining healthy cash flow. If a company pays suppliers too slowly, it might damage relationships and lose discounts, but paying too quickly could strain cash reserves that could be used for other investments.
Common Misconception
Many people assume that a higher accounts payable turnover is always better because it shows the company is paying bills quickly. However, a very high turnover might actually indicate the company is paying too fast and missing out on valuable payment terms that could help it manage cash more strategically.
In Practice
Suppose a retail company has total annual purchases of 500,000 dollars and an average accounts payable balance of 50,000 dollars. The accounts payable turnover would be 10, meaning the company pays its suppliers completely ten times per year, or roughly every 36 days. If this ratio increased to 15 next year, it would suggest the company is now paying suppliers every 24 days instead.
Etymology
How many times ACCOUNTS PAYABLE are TURNED OVER (paid and replaced) in a period.
Common Misspellings
Small business accounting made simple
Related Terms
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See Also
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