Business health and activity is measured through a number of ratios examining different aspects of the financial situation of the business. One of these ratios is “accounts payable turnover days,” also known as the average payment period.
Figuring Accounts Payable Turnover
Before calculating the accounts payable turnover days, you need to know the accounts payable turnover. The accounts payable turnover ratio measures the rate at which accounts payable are being paid over the period of one year. The formula is:
(Cost of Goods Sold) / (Accounts Payable)
For example, an accounts payable turnover figure of 16.8 would mean that over the course of one year, the total dollar value of accounts payable is paid about 16.8 times. Cost of Goods Sold can be taken from the income statement; Accounts Payable can be taken from the balance sheet.
Calculating Accounts Payable Turnover Days
Once you know the accounts payable turnover, you can calculate the accounts payable turnover days. Usually this is done for a period of one year, to determine the activity over one fiscal period for the company, but the formula can be adapted for any length of time. Sometimes 360 is used instead of 365 for simplicity in calculation and to match annual interest rate durations.
The formula for accounts payable turnover days is:
(365) / (Accounts Payable Turnover)
For example, an APTD figure of 28 means that the company takes an average of 28 days to pay off its accounts.
How is the Accounts Payable Turnover Days figure used?
A low figure for APTD means that the company pays its bills quickly: the time between purchasing materials and paying for them is small. If the figure is high, it could indicate that the company has problems with cash flow and cash shortages that should be examined.
“Efficiency Ratios.” Small Business Development Corporation Western Australia. N.p., n.d. Web. 19 Oct. 2012. <www.smallbusiness.wa.gov.au/efficiency-ratios>.
“Balance Sheet Ratios.” Southern Utah University. N.p., n.d. Web. 19 Oct. 2012. www.suu.edu/business/sbdc/pdf/balancesheetratios.pdf