Currently, any educated person knows that every company, organization or enterprise operates with a variety of economic and banking terms, which, in turn, can be quite specific for a simple layman. The following article will help you deal with one of these definitions. In particular, thoroughly examine what the payables turnover ratio is.
Terminology
First, let's figure out what constitutes the concept of turnover. A similar term is a financial indicator that takes into account the intensity of 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, accounts payable turnover ratio shows how much money the company is obliged to reimburse to the creditor organization by the due date, as well as the amount that will be required to make all necessary purchases. Thus, we can conclude that the accounts payable turnover ratio allows you to determine the number of cycles for full payments on submitted invoices. It should also be borne in mind that the supplier of a product may also act as a creditor.
Indicator calculation
The accounts payable turnover ratio (formula) is as follows: this is the ratio of the cost of goods sold to the average value of loan commitments. The term cost may mean the total cost of producing a particular product for the year. In turn, average debt is defined as the sum of the values of the required indicators at the beginning and end of the period under review, divided in half. Nevertheless, a more detailed detailed calculation and study of all the changes that occur is possible.
Second method
Another option for calculating such an indicator as accounts payable turnover ratio has become quite widespread . Thanks to this method, you can 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 period of collection of accounts payable. Its calculation is carried out according to the following formula: the ratio of the average debt to the cost of sales, multiplied by the number of days in a year, namely 365 days.
However, it should be borne in mind that when conducting an analysis 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, it is possible to find out the average number of days during which the services of suppliers are considered unpaid.
Fluctuations in values: increase
When researching the results of the activities of an enterprise, it is necessary to take into account that the payables turnover ratio largely depends on the scale of production, as well as on the sphere and industry of activity. For example, for organizations engaged in cash loans, the highest value of the indicator in question is most preferable.
However, for companies to which such assistance is provided, conditions are considered more favorable, allowing them to have a reduced value of the desired parameter. The described circumstance makes it possible to have some stock in the form of the balance of unpaid obligations as a source of free replenishment of financial accounts for normal work. An increase in accounts payable turnover ratio leads to the most rapid settlement with all suppliers. This type of obligation represents a short-term free loan, therefore, the longer the time period for repaying money is delayed, the more favorable the situation for the company is, since it provides an opportunity to use other people's finances. If the accounts payable turnover ratio has increased, then we can talk about some improvement in the state of the organization’s solvency in relation to suppliers of raw materials, products and goods, as well as off-budget, budget funds and company employees.
Fluctuation of quantities: decrease
A decrease in accounts payable turnover ratio may lead to some of the features described below.
1. Difficulties with payments on submitted bills.
2. Possible restructuring of relationships with suppliers to provide a more profitable payment schedule. Thus, if the payables turnover ratio has decreased, then we can talk about both the benefit for the enterprise on the one hand and the alleged loss of reputation in the other.
Analysis
Of course, when considering accounts payable turnover, it is also necessary to take into account the turnover ratio of receivables, since if you study only one of the two presented values, important data can be missed. 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, we can conclude that the high value of accounts payable helps to reduce both solvency and the overall financial stability of the enterprise.
Organization Benefit
If we take into account the share of accounts payable, then you can calculate the profit of the company in a fairly simple way. The benefit lies in the magnitude of the difference in interest on loans (in the general case it is assumed to be equal to the amount of obligations of this type) for the period of stay of financial assets in the account of the organization and the value of this debt. In other words, we can say 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 bank structures for loans issued to them.
Positive factor
It can be assumed that the turnover ratio is a value that is inversely proportional to the value of the velocity of circulation. Thus, it turns out that the higher the cyclic coefficient, the less time is needed for a full turn. Therefore, 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 economic and entrepreneurial activities of the enterprise are positive and favorable.
Conclusion
From the foregoing, several of the following conclusions can be drawn.
1. The value of the accounts payable turnover ratio as much as possible depends both on the sphere of activity of the organization, and on its scale.
2. For companies providing loans, the highest indicator in question is most preferable, and for organizations that require such payments, the lower value of the coefficient is beneficial, on the contrary.
3. The analysis process should take into account not only the turnover of accounts payable, but also the circulation of receivables.
4. Debt obligations include not only payments on loans, but also remuneration of employees of the organization, payments to contractors, taxes, fees, relationships with extrabudgetary and budget funds.
5. For the favorable development of entrepreneurial and economic activity of the enterprise, it is necessary that the turnover ratio for loans significantly exceeds the value of the same indicator for receivables.