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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 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
| Exercise | Calculate the accounts payable turnover ratio for 2 periods in accordance with accounting data: Page 1230 (beginning of 1st period) – 3,512 thousand rubles, Page 1230 (end of 1st period) – 4,266 thousand rubles, Page 1230 (beginning of 2nd period) – 4,198 thousand rubles, Page 1230 (end of 2nd period) – 3,615 thousand rubles, Page 2110 (1st period) - 11,315 thousand rubles, Page 2110 (2nd period) - 11,925 thousand rubles, |
| Solution | First of all, it is necessary to determine the average value of accounts receivable for each year: KZ avg.(1 period) = (3512+4266)/2=3889 thousand rubles. KZ avg.(2nd period) = (4198+3615)/2=3906.5 thousand rubles. Okz = 2110 / 1230 Okz (1 period) = 11315/3889 = 2.9 revolutions Okz (2nd period) = 11925/3906.5 = 3.05 revolutions Conclusion. We see that during the second period, accounts payable became larger, but despite this, the enterprise worked more efficiently, which can be explained by an increase in profits. |
| Answer | Okz (1) = 2.9 vol. Okz (2) = 3.05 vol. |
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 Accounts Payable Turnover Period.
Duration of accounts payable turnover - what shows
Shows the average period for repayment of the company’s debts (excluding obligations to banks and other loans)
Duration of accounts payable turnover - formula
General formula for calculating the coefficient:
Calculation formula based on balance sheet data:
| K dox = | Period in days |
| To okz |
Where To okz- accounts payable turnover ratio.
Accounts payable turnover duration - value
The longer the repayment period, the higher the risk of non-repayment. This indicator should be considered according to legal 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.
Duration of accounts payable turnover - diagram
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Synonyms
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Accounts payable turnover is an indicator that demonstrates how quickly a company can pay off its own debts to suppliers, contractors and other counterparties. Its calculation is usually carried out when a decision is made on cooperation between two enterprises (seller and buyer, for example).
Accounts payable turnover gives a clear picture of the counterparty's solvency. It protects against unprofitable deals and allows you to sign agreements only with reliable, financially stable companies.
Formula for calculating accounts payable turnover
There are two ways to calculate turnover:Taking into account the cost of production;
Including revenue.
In each of these methods, the same indicator is calculated - the accounts payable turnover ratio. Taking into account the cost of production, the coefficient can be calculated using the following formula:
Kokz = Srt\Skz, where:
Kokz – required turnover ratio;
Срт – cost of goods sold;
SKZ is the average indicator of accounts payable.
In turn, the average accounts payable (Akz) is very easy to calculate. To do this, you need to know the debt at the beginning and end of the billing period, then:
Skz = (Kznp + Kzkp)/2.
To calculate the accounts payable turnover ratio through revenue, another formula is used:
Kokz = V\Skz, where:
Kokz – accounts payable turnover ratio;
B – amount of revenue;
SKZ is the average accounts payable, which is calculated in the same way as in the previous method.
It is considered more accurate to calculate the coefficient taking into account the cost of production. In Russia this method is most often used. The choice is explained by the fact that when calculating taking into account revenue, the coefficient may be somewhat distorted due to different markups on the goods.
Formula for calculating accounts payable turnover in days
To assess the solvency of the counterparty and identify the financial condition of the prospective partner, it is somewhat more convenient to use the calculation of turnover in days. Together with the turnover ratio, the turnover period of accounts payable can be calculated. This is done according to the formula:Pokz = T/Kokz, where:
Pokz – turnover period of accounts payable;
T – billing period in days;
Kokz – accounts payable turnover ratio.
The shorter the period received (Pokz), the faster the partner will pay off the debts. It is not recommended to cooperate with companies whose turnover period is more days than the deferment that the partner can offer. In this case, the risk of not receiving your money on time is very high.
How does turnover affect the financial position of a company?
Of course, when calculating turnover indicators, it is necessary to take into account the situation in the complex:It can definitely be said that a high accounts payable turnover ratio indicates the financial stability of the enterprise - you can work with such a partner.
Additional analysis can be done by calculating accounts receivable. If its value is greater than the accounts payable indicator, the company will be able to cope with credit obligations.
However, a low accounts payable ratio is beneficial for the company itself - this allows it to use the counterparty’s assets for a certain number of days during the “free” period.
Accounts payable turnover is an indicator of the time during which a company pays its own debt to counterparties, for example, suppliers. In a general sense, the turnover period allows us to assess the solvency of the company, which is important for suppliers and contractors when making decisions about cooperation with a given enterprise. Investors also use this indicator in the process of evaluating a company, and also take it into account when deciding to invest their funds.
Analysts at various levels use the accounts payable (AP) turnover period to evaluate enterprises. Key metrics of credit debt turnover:
- Turnover ratio;
- Turnover in days.
The coefficient can be calculated based on the data financial statements according to the generally accepted formula:
Sales turnover = Cost of goods sold/Average value of sales
In an economic sense, cost of goods sold here refers to the sum of cost of sales and changes in inventory for the period. The average value of the debt is calculated as the average of the amount of debt at the beginning and at the end of the period. A more detailed formula looks like this:
Volume ratio = (Sales + (inventories at the end of the period - inventories at the beginning of the period))/((Debt. at the end of the period + Debt. at the beginning of the period) * 0.5)
This formula can be applied to any company, which publishes its financial statements. It is important to pay attention to the comparability of indicators including VAT: often inexperienced analysts make the mistake of putting incomparable indicators in the numerator and denominator, for example, cost of sales including VAT, and accounts payable excluding VAT.
In addition to the coefficient, the accounts payable turnover in days is calculated, the formula of which looks like this:
KZ turnover = 365/KZ turnover ratio
When the accounts payable turnover period is considered, the formula shows the average number of days that elapse from the time a company provides a service until it is paid.
In practice, a calculation using a simplified formula using revenue in the numerator is also used:
Volume of short-circuit coefficient = Revenue/Average annual value of short-circuit
Often, users of financial statements need to calculate this ratio using balance sheet data. This can be done using the following formulas:
- Okz = line 2120 + (line 1210kp - line 1210np))/(line 1520np + line 1520kp) x 0.5
- Okz = line 2110/(line 1520np + line 1520kp) x 0.5
Coefficient values
According to Order of the Ministry of Economic Development of Russia No. 373/pr, the duration of the circulation of short-term assets cannot exceed 40 calendar days.
In a managerial sense, the normal value of this indicator may depend on many different factors, for example, industry, size of the enterprise, etc. From the point of view of the enterprise, it is more profitable to have a low ratio, because this means that funds remain in the company’s accounts longer and are used for financing current activities, and free of charge, since it is not debt. In the case of lending from banks or through various financial market instruments, the company would pay interest for the use of funds, but KZ does not have such a requirement.
From the point of view of suppliers and contractors, a high turnover ratio is more profitable, since the lender is interested in faster payment for its services, and they are more willing to cooperate with companies with a high turnover ratio.
First of all, the indicator of the speed of payment for goods and services received plays an important role in assessing the liquidity of the company. The ratio of the turnover of accounts receivable and accounts payable is often calculated, resulting in a new ratio: if it is greater than one (that is, accounts receivable turn over faster than accounts payable), then for the company this is a positive factor in terms of interaction with suppliers and contractors.
A high value of the KZ turnover ratio also indicates the financial stability of the company: it always has funds to pay for the goods and services received. The indicator can increase both due to a reduction in the amount of debt and due to an improvement in operating indicators (sales growth or cost reduction).
Thus, accounts payable analysis is used by companies for internal management, as well as for mutually beneficial cooperation with suppliers and customers. Organizations analyze their turnover period to balance between profitable financing of their activities and a good reputation. In addition, it is useful for a company to know the turnover rate of its customers in order to understand how quickly it will receive payment for its goods and services.
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