Creditors' Turnover Rate

The accounts payable turnover ratio is a key metric that shows how quickly a company pays its suppliers. This metric is used to assess the company’s payment patterns and is of great importance to its liquidity and relationships with creditors.

The lower a company's accounts payable turnover ratio, the longer it takes the company to pay its suppliers.

What does the accounts payable turnover ratio indicate?

The accounts payable turnover ratio indicates how many times the company's average accounts payable are paid off over a given period—typically a fiscal year.

This key figure provides insight into:

• how quickly the company pays its suppliers
• How payment terms are applied in practice
• how much liquidity is temporarily tied up with creditors

A very low inventory turnover ratio may indicate long payment terms or tight cash flow, while a high inventory turnover ratio may mean that the company pays its suppliers quickly—perhaps more quickly than necessary.

How is the accounts payable turnover ratio calculated?

The accounts payable turnover ratio is typically calculated as follows:

Creditors' Turnover Ratio = Cost of Goods Sold / Average Accounts Payable

Average accounts payable is often calculated as the average of the opening and closing balances for the period.

This key figure can also be expressed as the average payment period, which shows the average number of days it takes for the company to pay its suppliers.

Creditors' Turnover Rate and Payment Terms

The accounts receivable turnover ratio is closely linked to the average payment period. A low turnover ratio corresponds to a long payment period, while a high turnover ratio indicates prompt payment.

If a company’s agreed-upon payment terms are, for example, 30 days, but the actual payment period is significantly shorter, the company may miss out on liquidity benefits. Conversely, late payments can strain relationships with suppliers.

Why is the accounts receivable turnover ratio important?

The accounts receivable turnover ratio is important because it affects a company's liquidity and its bargaining position with suppliers.

This key figure is used, among other things, to:

• assess whether payment terms are being used effectively
• balance liquidity and supplier relationships
• identify changes in payment behavior
• support cash flow planning

Consciously managing the pace of payments can be an effective tool in a company’s financial management.

Creditors' Turnover Rate in Relation to Debtors

To maintain healthy cash flow, there should be a balance between how quickly the company receives payments from customers and how quickly it pays its suppliers.

If customers pay slowly while suppliers are paid quickly, liquidity pressures may arise. Conversely, making sensible use of suppliers’ payment terms can give the company financial breathing room.

Actively use key performance indicators in financial management

The accounts payable turnover ratio provides the greatest value when tracked over time and compared with the company’s payment terms and liquidity targets.

Significant fluctuations in this key figure may indicate changes in the company's financial situation or payment practices and should prompt a more detailed analysis.