What Does It Mean?Accounts payable turnover measures the rate at which a company can pay its suppliers and other obligations. The KPI is measured over an accounting period, and gauges how many times a company can pay off its supplier obligations successfully. Accounts payable turnover is usually a short-term financial measure.
Why Does It Matter?This accounts payable KPI is important in financial analytics because it indicates how well-equipped a company is for covering their obligations every month and can point to financial performance when viewed over a longer period. A higher turnover ratio indicates that a business can repay its obligations more rapidly, and thus is in better financial health. Viewed comparatively, it can also give a picture of overall financial performance, where falling turnover rates indicate worsening conditions, and vice versa.
How Do You Measure the KPI?To measure accounts payable turnover, you need to know the full cost of goods sold in a month, including supplier purchases, bills, and other short-term obligations. To get the rate of accounts payable turnover, divide by your average accounts payable. For example, a company that has total costs of $100 million, and an average accounts payable of $25 million would have an accounts payable turnover rate of 4. A higher number usually indicates that a company pays off its obligations more frequently.
What Data Sources Would You Use to Measure the KPI?Any accounts payable turnover analysis must include data about supplier costs and other obligations related to generating sales. This includes measuring data about providers, the cost of raw materials, labor, and more. Tracking data on purchases and manufacturing processes would be vital to this calculation. In terms of accounts payable, measuring overall payments and taking data from accounting dashboards is key.
Give Me An Example…Imagine that your company has been able to improve its sales marginally, but bills from suppliers continue to pile up and it seems revenues cannot keep pace. Understanding how often you can pay your obligations can help make better decisions about how many goods to produce, the price point at which to sell them, or even the feasibility of current suppliers and manufacturing practices. Lower accounts payable turnover can indicate that your financial model is not optimal for your level of sales.
What Benchmarks/Indicators Should I Use?
- Monthly costs
- Supply costs
- Average accounts payable
- Cost of goods sold