Accounts payable turnover (CP) is an indicator that relates the amount of money to be returned to the creditor organization (this mainly concerns suppliers) by a specific date, with the current value of purchases, or with goods and services purchased from creditors.
Of course, the financial stability and solvency of any organization depends on accounts payable. If its share is high enough, the company’s financial stability and solvency are reduced, but accounts payable to contractors and suppliers enable the organization to use something like “free” money for the entire period of accounts payable turnover.
It is not difficult to calculate how profitable it is for the enterprise in each particular case. The company could take the same amount at the bank at interest. In fact, the benefit of the organization lies in the difference between the amount of interest on the loan for the period of existence of this debt on the balance sheet of the enterprise , if it were taken, of course, and the amount of existing payables. In other words, the profit of the enterprise consists in the amount of interest for a loan granted by the bank for a given amount and for a given period, if the company actually took it.
Accounts payable turnover is highly dependent on the organization's industry and the scale of its activities.
KZ turnover ratio is referred to indicators showing business activity, which characterize how efficiently the organization uses its financial resources. To calculate this turnover ratio, the cost of sales must be divided by the value (average annual) of accounts payable, it shows the required number of turns to pay the bills issued by the organization.
When evaluating the turnover of short-circuit, the following indicators are used:
- KZ repayment period (in days);
- short-circuit turnover (at times).
Accounts payable turnover is determined through the ratio of sales revenue to the arithmetic average of accounts payable. The average payables is defined as the amount of payables available at the beginning and end of the period divided by two. The payable repayment period, for example, in days, is determined by dividing the period in days (360 days are considered per year) by the turnover of KZ.
Keep in mind the importance of the length of the delay period - the longer this period, the higher the risk of default on delay.
In the ideal case, it is desirable that the organization collect debts from accounts receivable even before it is required to pay debts to creditors. If there is a large number of days in the turnover period of KZ, this may indicate an insufficient amount of available cash necessary to meet the current needs that arise from the organization as a result of reduced sales, increased costs, and increased needs for working capital.
For lenders, it is preferable that the turnover of accounts payable and, accordingly, the turnover ratio turn out to be higher, while for the enterprise or organization it is much more profitable to have a low ratio. This gives them the opportunity to use the balance from unpaid KZ as a rather convenient (it’s free) source for financing their current activities.
Accounts payable turnover shows the number (usually during the year) of repayments by the organization of the average value of its accounts payable.