The accounts payable turnover ratio is a key metric that shows how well your business manages supplier payments. It helps you understand if you’re holding onto cash too long or paying too quickly, which can affect your cash flow and financial health.
In this blog, we’ll break down how to calculate it, what it says about your business, and how to use it.
Read: A Complete Guide to Financial Statement Analysis for Strategy Makers
You’ll also get practical tips and examples to help you improve this important ratio and your financial management.
What is the Accounts Payable Turnover Ratio?
The accounts payable turnover ratio measures how many times your business pays off its accounts payable during a specific period. It’s a simple way to evaluate if your payment practices are in line with your financial strategy.
It’s also called “payables turnover ratio” or “creditors turnover ratio,” and it’s often used to track how efficient you are at managing cash flow, and paying your suppliers.
Industries where supplier relationships and payment cycles can directly impact operations (like FMCG, pharma, and manufacturing) find this ratio particularly useful.
For more about where this ratio fits in the bigger picture, read our guide to efficiency ratios.
Formulas and How to Calculate Accounts Payable Turnover Ratio
The accounts payable turnover ratio is typically calculated using a standard formula, but alternative methods exist for companies that don’t track detailed purchase data. Let’s start with the most common calculation.
The Standard Formula for APTR
The most common way to calculate the accounts payable turnover ratio is by dividing your net credit purchases by your average accounts payable during the period:
This method works well for most companies that track their purchases on credit.
Example: your business made $200,000 in credit purchases. If your accounts payable balance started at $50,000 and ended at $70,000, your average accounts payable would be $60,000. Divide $200,000 by $60,000, and the result is 3.33. This means your business paid off its accounts payable about 3.33 times during the period you’re calculating for.
Converting APTR to Days Payable Outstanding (DPO)
Sometimes it’s more helpful to look at the accounts payable turnover ratio in terms of days. This is called Days Payable Outstanding (DPO). It tells you the average number of days it takes to pay your suppliers.
The formula is:
Example: if your AP turnover ratio is 3.33, you can calculate DPO like this:
DPO = 365 ÷ 3.33 ≈ 110 days
This means it takes your business about 110 days, on average, to pay its suppliers.
Alternative APTR Formula Using COGS
If your business doesn’t track credit purchases, you can use the cost of goods sold (COGS) instead. The formula is:
This method works best in industries like manufacturing or retail, where most purchases are tied to production costs. However, it’s less precise if your total COGS doesn’t closely match your credit purchases.
Example: if your COGS is $300,000 and your average accounts payable is $60,000, your accounts payable turnover ratio would be:
300,000 ÷ 60,000 = 5
This means your business paid off its accounts payable five times during the period.
What Does the Accounts Payable Turnover Ratio Tell You?
This ratio gives you a quick look at how your payment habits affect your business. A high APTR means you’re paying suppliers frequently. This could mean strong cash flow, but it might also mean you’re missing opportunities to use available credit terms to your advantage.
A low APTR, on the other hand, suggests you’re taking longer to pay suppliers. This could help you conserve cash. It also may signal financial struggles or strained supplier relationships.
Understanding your APTR in the context of your industry is crucial. For example, retail businesses often have higher ratios because of shorter payment cycles, while manufacturing companies may have lower ratios due to longer credit terms.
Want to dig deeper into financial metrics? Check out our guide to liquidity and solvency ratios.
Accounts Payable Turnover Ratio in Different Industries
The accounts payable turnover ratio works differently depending on your industry. Here are two examples to show how it plays out:
Retail Business
In retail, goods move fast, and suppliers expect to be paid quickly. A retailer with an APTR of 8 pays its suppliers eight times a year. That’s a DPO of about 46 days. This is common in retail and shows the business is maintaining strong supplier relationships while keeping inventory moving.
Manufacturing Business
In manufacturing, production cycles take longer, so payment terms can be more flexible. A manufacturer with an APTR of 4 pays its suppliers quarterly, with a DPO of about 91 days. This way the business can hold onto cash longer, which can help balance the production costs.
Knowing what’s normal for your industry is important when interpreting your ratio. Comparing your APTR to competitors can highlight ways to improve cash flow or renegotiate supplier terms.
In the table below, you can see approximate numbers for the AP turnover ratio and DPO, by industry:
Your accounts payable turnover ratio is only useful in context. Compare it to industry standards, and your company’s past performance. Keep in mind that seasonal changes, supplier agreements, and operational changes can all affect your results. The key is finding the right balance between efficient payments, healthy cash flow, and strong supplier relationships.
What the Accounts Payable Turnover Ratio Won’t Tell You
The accounts payable turnover ratio is useful, but it doesn’t tell the whole story. It doesn’t account for differences in supplier payment terms or industries where long payment cycles are normal, like construction or real estate. Seasonal changes can also affect your ratio—a retailer’s APTR might drop during slower months when fewer purchases are made.
It also doesn’t include all types of transactions. For example, cash purchases, barter arrangements, or other non-standard payment methods won’t show up, which could skew the ratio for businesses that rely on these practices.
The APTR doesn’t tell you if payments were made on time or late, and can’t show the quality of your supplier relationships. A high ratio might look good but could hide delays that hurt supplier trust. It also assumes all suppliers offer the same payment terms, which isn’t realistic.
Finally, the ratio doesn’t reveal much about your overall financial health. A low APTR might mean cash flow problems, or it could just reflect smart payment timing. Without additional context, it’s hard to know.
To get the full picture, combine APTR with other metrics like days payable outstanding (DPO), liquidity ratios, and accounts receivable turnover. Together, they can show how your payment practices affect cash flow and supplier relationships.
How APTR Fits Into Your Company’s Cash Flow
The accounts payable turnover ratio is just one piece of your company’s financial puzzle. It directly affects days payable outstanding (DPO), which is part of the cash conversion cycle (CCC).
The CCC shows how long it takes to turn investments in inventory and receivables into cash.
Improving DPO by managing APTR can help conserve cash and shorten your CCC. For more about this, check out our guide to the cash conversion cycle.
Conclusion
The accounts payable turnover ratio shows how well you’re balancing supplier payments and cash flow. It’s a useful metric, but understanding it in context—like industry benchmarks and other financial metrics—is what makes it valuable.
Manually tracking these numbers can be a hassle. Farseer takes the guesswork out by automating reports and providing real-time data. With tools to track your APTR, compare benchmarks, and plan more effectively, Farseer helps you make better decisions and stay on top of your finances.
