/ / Accounts payable turnover ratio: formula, reduction and increase

Accounts receivable turnover ratio: formula, decrease and increase

Currently any educated personknows that each firm, organization or enterprise operates with a variety of economic and banking terms, which, in turn, may be specific enough for a simple inhabitant. The article below will help to deal with one of these definitions. In particular, thoroughly examine what is the ratio of accounts payable turnover.

Terminology

Payables turnover ratio

Для начала разберемся, что представляет собой concept of turnover Such a term is a financial indicator that takes into account the intensity of the use of any particular funds, assets or liabilities. In other words, it allows you to calculate the speed of one cycle. Such a coefficient can be considered one of the parameters of business and economic activity of the enterprise in question. In turn, the accounts payable turnover ratio shows how much money the company is obliged to reimburse to the credit organization by the appointed date, as well as the amount that will be required to complete all the necessary purchases. Thus, we can conclude that the ratio of payables accounts payable allows you to determine the number of cycles for full payments on the invoices. It should also be borne in mind that the supplier may also act as a creditor.

Calculation of the indicator

Reduction in payables turnover ratio

Accounts payable ratiodebt (formula) is as follows: this is the ratio of the cost of goods sold to the average value of the liabilities on loans. The term cost may be understood as the total amount of the cost of producing a particular product for the year. In turn, the average debt is defined as the sum of the values ​​of the desired indicators at the beginning and end of the period in question, divided in half. Nevertheless, a more detailed detailed calculation and study of all the changes taking place is possible.

The second method

Quite widespread yetOne option is the calculation of such an indicator as accounts payable turnover ratio. Thanks to this method, it is possible to determine the average number of days during which the organization in question will pay all its debts. Such a variant of the parameter is called the collection period of payables. It is calculated using the following formula: the ratio of the average value of the debt to the cost of sales, multiplied by the number of days per year, namely, 365 days.

Accounts payable turnover ratio increased

However, it should be borne in mind that whenanalysis based on reports for any other periods, it is necessary to adjust the value of the product value accordingly. As a result of such calculations, you can find out the average number of days during which the services of suppliers are considered unpaid.

Fluctuations of values: increase

When researching the performance ofor another enterprise, it is necessary to take into account that the turnover ratio of accounts payable largely depends on the scale of production, as well as on the scope and industry of activity. For example, for organizations engaged in cash loans, the most preferable is the high value of the indicator under consideration.

Accounts payable turnover ratio shows

However, for companies that are grantedsuch assistance is considered more favorable conditions that allow you to have a lower value of the desired parameter. This circumstance makes it possible to have some stock in the form of the balance of unpaid liabilities as a source of free replenishment of financial accounts for normal work. The increase in the turnover ratio of accounts payable leads to the most rapid settlement with all suppliers. This type of obligation represents a certain short-term free loan, therefore, the longer the terms of returning money are delayed, the more favorable for the company is the situation, since it provides the opportunity to use other people's finances. If the turnover ratio of accounts payable has increased, then we can talk about a slight improvement in the organization's ability to pay in relation to suppliers of raw materials, products and goods, as well as extra-budgetary, budgetary funds and employees of the company.

Fluctuations: Decrease

Reducing the payables turnover ratio may result in some of the features described below.

1. Difficulties with payments on invoices.

2Possible restructuring of relationships with suppliers to ensure a more advantageous payment schedule. Thus, if the ratio of accounts payable turnover has decreased, then we can talk about both the profit for the enterprise on the one hand, and the alleged loss of reputation in the other.

Payables turnover ratio formula

Analysis

Of course, when considering the turnoveraccounts payable must also take into account the receivables receivables ratio, since if you study only one of the two presented values, you can miss important data. This, in turn, can lead to an unfavorable situation for the organization as a whole, when the first of these indicators significantly exceeds the second. In addition, from the foregoing, it can be concluded that the high value of payables helps to reduce both solvency and overall financial stability of the enterprise.

Benefit organization

If you take into account the share of accounts payabledebt, then calculate the profits of the enterprise can be a fairly simple way. The benefit lies in the magnitude of the difference in interest on loans (in general, it is assumed to be equal to the sum of obligations of this type) for the period the funds are held in the organization’s account and the amount of the debt itself. In other words, it can be said that the profit of the company in question is determined by the amount of financial resources saved due to the fact that there is no need to pay interest to the banking institutions for loans issued from them.

Increase in accounts payable turnover ratio

Positive factor

It can be assumed that the turnover ratiois a value that is inversely proportional to the value of the velocity of circulation. Thus, it turns out that the higher the coefficient of cyclicity, the less time is needed for a full turn. Consequently, if the value of the turnover of accounts receivable is higher than the value of accounts payable, then they consider that the conditions for the further development of the economic and entrepreneurial activities of the enterprise are positive and favorable.

Conclusion

Accounts payable turnover ratio decreased

From all of the above, we can draw several conclusions.

1. The value of the turnover ratio of payables depends as much as possible on the scope of the organization, and from its scale.

2For companies that provide loans, the highest considered indicator is most preferable, and for organizations that need such payments, the opposite is beneficial.

3. The analysis process should take into account not only the turnover of accounts payable, but also the treatment of receivables.

four.Debt obligations include not only payments for loans, but also remuneration of employees of the organization, payments to contractors, taxes, fees, relationships with extra-budgetary and budget funds.

five.For the favorable development of business and economic activity of an enterprise, it is necessary that the turnover ratio for loans substantially exceeds the value of a similar indicator for receivables.