Accounts payable turnover
How many times a year a business pays off its average accounts payable balance, a measure of how quickly it pays suppliers.
In short
- Higher turnover means suppliers are paid faster. Lower means the business holds on to cash longer.
- Dividing 365 by the ratio gives the average number of days to pay.
- Compare it with your payment terms and with your industry, not in isolation.
AP turnover = Purchases on credit ÷ Average accounts payable Days to pay = 365 ÷ AP turnover
Average accounts payable = (Opening AP + Closing AP) ÷ 2. If purchases aren't available, cost of goods sold is a common substitute.
Accounts payable turnover divides what a business bought on credit over a period by the average amount it owed suppliers during that period. The result says how many times the payables balance was "turned over", or paid down and rebuilt, in a year.
Reading the number
A turnover of 12 means the business pays, on average, about once a month, or roughly every 30 days. A turnover of 6 means about every 61 days. Neither is good or bad on its own. What matters is how the figure compares with the terms suppliers have offered. If most suppliers give net 30 and the business takes 61 days, it is paying late. If it pays in 15 days without receiving any discount, it may be giving away cash for nothing.
Practical notes
- Ideally use total purchases on credit. Many analysts use cost of goods sold as a stand-in, because purchases are not always reported.
- Use the average of opening and closing payables, not a single balance, to smooth out timing.
- A sudden drop in turnover can signal cash pressure. A sudden rise can mean suppliers have tightened terms.
The same information expressed in days is days payable outstanding, which many finance teams find easier to discuss.
Worked example
A distributor's year
A distributor buys $4.8 million from suppliers on credit during the year. Payables were $360,000 at the start and $440,000 at the end, for an average of $400,000. AP turnover is $4.8M ÷ $400K = 12. The business pays in about 365 ÷ 12 = 30 days, in line with its net 30 terms.