What is accounts payable turnover?

Definition

Accounts payable turnover is how often, in a period, the shop pays what it owes vendors and rebuilds that balance with new bills. On the books, it is a reading of accounts payable against purchases, not a ledger account you credit.

A print shop uses it to see whether vendor bills are being paid off and replaced at a steady pace. A higher figure means the payable pile turned more times; a lower figure means the same bills sat longer.

It is a count of turns, not a count of days. One large paper order that sits unpaid can pull the average balance up and the turns down even when small supplies clear on time.

Stay with how often the balance was paid and rebuilt. Cash leaves when a bill is paid; this page asks how many times that happened relative to the average pile.

Where it shows up

Balance Sheet: Related to accounts payable turning over.

P&L: Related to purchases that hit COGS or expense.

Cash flow: Related to how often those bills leave the bank.

See also: Accounts Payable · Days Payable Outstanding · Cost Of Goods Sold

When you look at the Balance Sheet, this reading starts from the accounts payable total. You will not find a line labeled with these turns.

The Income Statement is related through purchases that hit cost of goods sold or expense. The payable itself lives on the Balance Sheet until the bill is paid.

On the Statement of Cash Flows, more turns usually pair with bills leaving the bank. Changes in working capital will show that cash effect even when leftover profit looks fine.

When the figure is high, the shop is paying and re-ordering often. When it is low, a larger share of last period's paper and ink is still sitting as unpaid bills.

How it works

Take purchases for the period. Divide by average accounts payable.

Average accounts payable is the beginning balance plus the ending balance, divided by two. A shop that started the year at $18,000 and ended at $22,000 has an average of $20,000.

The result is how many times that average balance was paid off and rebuilt. Twelve times means the pile turned twelve times in the period.

Use purchases, not every operating expense. Rent and payroll never sat as vendor bills for paper, so mixing them in makes the pile look like it turned faster than it did.

If the shop does not track purchases separately, cost of goods sold is a common stand-in when most vendor spend is stock that will be sold. Stay consistent from period to period.

Stay with this count of turns. Converting the same relationship into a wait in days is a different reading.

The figure goes up when bills are paid down or the average balance shrinks. It goes down when unpaid bills pile up or a few large orders sit.

After the period closes, recompute with the new average and that period's purchases. Last year's 12 times is history.

Example

Form & Ink, a neighborhood print shop, buys paper, plates, and ink on account. Purchases for the year were $240,000, and average accounts payable was $20,000.

Divide $240,000 by $20,000. The result is 12 times.

Those twelve turns mean the average vendor-bill pile was paid off and rebuilt twelve times in the year. The shop is not reading days here; it is reading how often the balance turned.

If the same year's purchases had sat against $40,000 of average payables, the figure would have been 6 times. The paper bought would be the same; the bills would have turned more slowly.

A $12,000 paper order that sits unpaid for months will pull the average balance up and the turns down. Paying that bill later drops cash without booking a second purchase.

If next year purchases stay $240,000 and average payables fall to $16,000, the figure rises to 15 times. Bills left the bank faster without a change in the paper used on the Income Statement.

The shop does not post a line that says these turns. The books already hold the bills and the purchases; you divide.

Common mix-ups

Accounts payable turnover is not the payable balance. The balance is a dollar total; this page is how many times that total was paid off and rebuilt.

Accounts payable turnover is not days payable outstanding. Days convert the same relationship into a wait; this page stays on the count of turns.

Accounts payable turnover is not an expense. Buying paper raises a payable; the cost hits when the job uses that paper, and paying later is a cash event.

Related terms

• Accounts Payable: Amounts the business owes vendors for goods or services already received.
• Days Payable Outstanding: The average number of days the business takes to pay its vendors.
• Cost Of Goods Sold: The direct cost of the products sold during the period.
• Vendor Bill: The invoice a supplier sends that becomes a payable.
• Accounts Payable Aging: A report bucketing unpaid vendor bills by how long they have been outstanding.
• Check Run: The scheduled batch in which approved vendor bills are paid.
• Payment Terms: The agreed deadline and conditions for paying an invoice.
• Cash Conversion Cycle: The number of days between paying for inputs and collecting from customers.