Analysis of accounts payable turnover formula. Accounts payable turnover ratio: formula, decrease and increase

DEFINITION

It is an indicator reflecting the business activity of any organization (enterprise).

The formula for the accounts payable turnover ratio is calculated in accordance with accounting and business accounting data:

• Balance sheet of the company (form - No. 1),
• Report on financial results (f - No. 2).

The accounts payable turnover ratio formula is used to determine ways to maximize a company's profits and increase its profitability.

Accounts payable turnover ratio formula

The formula for the accounts payable turnover ratio reflects the rate at which an enterprise repays its own debt to creditors (contractors, suppliers). The accounts payable turnover ratio will show how many times the accounts payable are turned over when the company pays off its obligations.

The general formula for the accounts payable turnover ratio is calculated by relating the amount of revenue to the average annual amount of accounts payable:

Okz = Vyr/KZ

Here Okz is an indicator of accounts payable turnover,

B is the company’s revenue for the period being calculated,

KZ - the amount of accounts payable (for example, the annual average, if the indicator is calculated for the year).

In order to determine the average annual amount of accounts payable, add up the indicators at the beginning and end of the billing period and divide this amount by 2. Most often, the indicator is calculated for the year.

Formula for accounts payable turnover ratio on balance sheet

If we substitute lines from the balance sheet and income statement into the formula for the accounts payable turnover ratio, the formula takes the following form:

Okz = line 2110 / (line 1520)

Here line 2110 is the amount of revenue taken from the balance sheet,

Line 1520 – accounts payable from the income statement.

The average annual amount of accounts payable on the balance sheet is determined using the following formula:

KZsg=(line 1520np + line 1520kp)/2

Accounts payable turnover period

Together with the accounts payable turnover indicator, the accounts payable turnover indicator is often used, reflecting the number of days in which accounts payable is converted into cash.

POkz = 360 (365) / Okz

Here PO kz is the period of turnover of accounts payable,

Okz – accounts payable turnover ratio.

In the formula, sometimes instead of 360 days the value 365 days is given, while the economic meaning of the formula is to determine the number of days during which the company has repaid its debt to creditors.

The role of accounts payable turnover

The accounts payable turnover ratio formula is considered the most important way to determine the performance of any company. The following persons in the company use the accounts payable turnover ratio in their work:

• Director, top manager;
• Head of Sales Department,
• Product sales managers,
• Financial managers, etc.

The accounts payable turnover ratio is directly related to indicators such as liquidity and solvency. The higher the accounts payable turnover value, the higher the liquidity (solvency). They also often compare the accounts payable turnover rate with the accounts receivable turnover rate. If the first one is greater, then we can talk about the efficiency of the enterprise.

Examples of problem solving

EXAMPLE 1

EXAMPLE 2

Definition 1

Accounts payable are a type of debt of an organization to other entities, which this entity is obliged to fully repay.

Accounts payable usually arise when the date of receipt of services (goods) does not coincide with the actual date of payment.

The presence of accounts payable at an enterprise is not a favorable factor and reduces the quality indicators for assessing the financial condition of the enterprise.

To analyze the effectiveness of accounts payable management at an enterprise, the following coefficients are most often used:

• turnover ratio,
• coefficient of dependence of the company on accounts payable;
• period for repayment of accounts payable,
• self-financing ratio;
• profitability of accounts payable and others.

When choosing which of the indicated indicators (coefficients) the state of the organization's accounts payable will be analyzed, you need to remember that a high-quality control system should not be overloaded with calculations. Therefore, it is justified to include in the analysis of accounts payable only those indicators that are most suitable for a particular organization and fit into its system of financial ratios.

Turnover ratio

Let's consider how the accounts payable turnover ratio is determined when analyzing this type of debt of an organization. This coefficient shows how quickly the organization makes settlements with its counterparties. The formula used to calculate the value of the turnover ratio is:

The accounts payable turnover ratio can be calculated based on data on the cost of goods, services, and work. It is recommended to study this indicator over several periods in dynamics, as well as comparing it with the turnover ratio for accounts receivable.

Calculation of the repayment period

The accounts payable period is sometimes also called the turnover period. It provides the user of the analysis with information on how many days on average the organization takes to pay its debts. To calculate this repayment period, use the following formula:

Note 1

Ideally, non-overdue accounts payable should have a repayment period equal to or greater than the repayment period of receivables.

The company's dependence on accounts payable

The company's dependence on accounts payable ratio reflects what share of the organization's assets is financed by its creditors. When analyzing this coefficient, it is important to take into account the specifics of the industry in which the organization operates, as well as the fact that it caused the formation of the dependence, whether it is short-term or long-term in nature.

The organization's dependence ratio on accounts payable is calculated using the formula given below:

Calculation of the organization's self-financing ratio

The self-financing ratio is sometimes also called the organization's financial independence ratio. It reflects the proportion of an organization's debts that can be repaid using its own capital.

Accounts payable turnover is an important indicator of the financial performance of an enterprise. The resulting figure clearly demonstrates the company’s ability to repay its debts to suppliers within a certain time interval.

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The use of this calculation in business can clearly convince the counterparty company to make a decision on cooperation if the solvency is high enough. Knowing the turnover rate can protect you from financially unprofitable or risky transactions.

What it is

In economics, accounts payable turnover refers to the rate at which a company repays its debts to suppliers and contractors. The resulting figure is called the turnover ratio.

Let us recall that accounts payable (AC) are the organization’s obligations to suppliers and contractors, financial loans and internal debts of the company, for example, for wages to its employees.

This also includes obligations to pay taxes and insurance fees, pay dividends to the company's shareholders and return money for products sold. Thus, the more debts a company has, the higher its credit debt indicators.

Is it good or bad? As practice shows, the so-called “debt load” of an enterprise leads to an increase in financial burden and an increase in the risk of non-payments. The debtor to the organization failed to pay on time and a debt arose to the budget, for which a penalty is charged. The situation is even worse if the loan is overdue - the penalty interest is higher.

It turns out to be a vicious circle - debts begin to grow exponentially and soon the organization simply will not be able to fulfill its obligations to partners. To prevent this from happening, it is necessary to timely adjust the enterprise’s policy based on the express analysis carried out.

The credit debt turnover ratio is used when analyzing the economic activities of an enterprise. A high value of the ratio indicates the financial stability of the organization.

That is why the task of an experienced manager is to set up production so that emerging debts are repaid as quickly as possible. This allows not only to stimulate the production activity of the enterprise, but also to have a positive effect on its business image.

It is very important to monitor the size of the coefficient over time - over several reporting periods - this will help maintain the efficiency and stability of any production.

Implications for the enterprise

Accounts payable turnover is based on the speed of repayment of the company's debts to counterparties that arise in the course of its life. The calculated ratio indicates how many times during the reporting period the organization can repay its debts. The relationship of this indicator with the solvency and liquidity of the company allows us to collectively deeply assess the dynamics of the institution’s development.

An increase in the indicator indicates an increase in the turnover rate and, therefore, a strengthening of the financial condition; a fall is a reason to think about why the debt on accounts payable has become more protracted. Is there any cause for concern here? The answer to this question can only be given by a more in-depth analysis.

Formulas for calculating the accounts payable turnover ratio

Method 1. The ACO is obtained by dividing the cost of goods sold (COGS) by the average accounts payable (AAP). The term cost refers to the amount of money spent on the production of any product within the full technological cycle.

Average accounts payable is equal to half the amount of accounts payable at the beginning and end of the reporting period.

OKZ coefficient = SPP/SKZ

Method 2. The second method of calculating the coefficient becomes possible by dividing the total revenue of the enterprise (B) by the average accounts payable:

OKZ coefficient = V/RMS.

Experts say that the first method is more accurate, since the second method, when the markup price changes, can lead to distortions in the final result.

In addition to calculating the turnover ratio in numbers of times, a calculation in the number of days is sometimes used, which has a more practical meaning.

The action is carried out by dividing the calendar year in the amount of 360 or 365 days by the resulting turnover ratio. Typically a time interval of 360 days is used to simplify calculations - each month is taken as a 30-week period.

Short circuit coefficient (in days) = 360/ OKZ coefficient.

The result of the calculations made will be able to show the company management the period necessary for the organization to be able to fully pay off its debts.

It should be noted that in order to obtain an accurate assessment of the state of the enterprise, analysis of accounts payable by calculating the turnover ratio will be incomplete if carried out without taking into account other important factors.

One of the most important indicators that helps to obtain a true picture of the company’s affairs is to assess the dynamics of accounts receivable turnover (AR). Only a comparison of these two quantities can reveal the overall picture.

Analysts argue that the excess of the KZ turnover ratio over the indicators for calculating the DZ increases the profitability of the company and indicates that the organization has more financial opportunities to expand production. Free funds allow you to dispose of them as you wish, which increases the degree of financial freedom of the enterprise. If invested correctly, this can lead to an even greater increase in profits.

Normal value

It is difficult to establish a normal value for the accounts payable turnover ratio - it is highly individual for each industry. It may also differ depending on the scale of the enterprise’s activities: for small businesses it is one, for large industrial giants it is completely different.

To make a qualitative analysis of this coefficient, one should take as a basis the average coefficient obtained from a study of several successful companies - industry leaders. This information will provide invaluable assistance in forming the long-term strategy of the enterprise.

Cycle fluctuations are quite possible within one or more reporting periods. There is nothing wrong with this - the enterprise acts as a living organism, subject to its changes and fluctuations depending on its internal development and market conditions.

Fluctuations in the coefficient values ​​upward are good for credit institutions issuing loans. A high turnover ratio is also favorable for other organizations - the company's solvency remains high.

If the value of the coefficient decreases, you should be more attentive to the requirements for payment of payments and, perhaps, rebuild relations with suppliers and receive a more preferential payment schedule. This will allow you to successfully overcome an unfavorable period in the life of the organization and change the situation in a positive direction.

As a rule, the information received is equally interesting to the company's management, legal department, its creditors and investors. Initial data serves as an important factor for finding ways to increase the liquidity of an enterprise.

The coefficient is equal to the ratio of the number of calendar days in a year to the turnover ratio of accounts payable. The initial data for the calculation is the balance sheet.

It is calculated in the FinEkAnalysis program in the Business Activity Analysis block as the Turnover period of accounts payable.

Accounts payable turnover period - what it shows

Shows the average period for repayment of a company's debts (excluding obligations to banks and other loans)

Accounts payable turnover period - formula

General formula for calculating the coefficient:

Calculation formula based on balance sheet data:

Where To okz- accounts payable turnover ratio.

Accounts payable turnover period - value

The longer the repayment period, the higher the risk of non-repayment. This indicator should be considered by legal entities and individuals, types of products, payment terms, i.e. terms of transactions.

Acceptable values: the fewer days it takes to turn over accounts payable in terms of accounts payable, the better.

Accounts payable turnover period - diagram

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Synonyms

More found about the turnover period of accounts payable

1. Accounts receivable turnover ratio
   turnover
2. Capital turnover management
   The enterprise began to use funds from other enterprises in its turnover to a greater extent 8 Term turnover accounts payable characterizes the average period of repayment of the enterprise's debts for current obligations in days
3. Specifics of assessing receivables and payables of an enterprise
   This may reduce the likelihood of the debtor satisfying the demands of the new owner since he did not previously have funds available to secure this receivable due to the use of a balance scheme of accounts receivable and payable. In the world practice of market relations, the repayment of debt obligations to creditors is unconditional and... Calculation of the coefficient turnover receivables according to the formula Kobdz VR DZ where VR is revenue from sales of products... Calculation of the repayment period for receivables Srdz 360 Kobdz where Srdz is the repayment period for receivables 3.
4. Financial ratios
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   Average term turnover accounts payable days 84.1 97 58.1 58.3 52.9 33.7 15.1 29.7 26.1 Duration
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   Coefficient turnover funds in settlements 0.492 0.624 9.053 13.758 21.385 20.893 Term turnover funds in settlements days 732 577 40 26 17 -715 Turnover accounts payable
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