Turnover of accounts payable

Accounts payable turnover is an indicator that relates the amount of money to be repaid to a creditor organization (this mainly applies to 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 the accounts payable. If its share is high enough, the company is losing both financial stability and its solvency, but accounts payable to contractors and suppliers make it possible for the organization to use something like "free" money for the entire period of the turnover of accounts payable.

It is not difficult to calculate how profitable the enterprise is in each particular case. The enterprise could take the same amount in the bank at interest. In fact, the benefit of the organization is the difference between the amount of interest on the loan for the period of existence on the balance sheet of the enterprise of this debt, if it was taken, of course, by the size of the existing accounts payable. In other words, the profit of the enterprise consists in the amount of interest for the loan granted by the bank for this amount and for a given period, if the enterprise actually took it.

Turnover of accounts payable is strongly dependent on the industry of the organization, the scale of its activities.

The turnover factor of short-term employees is referred to indicators showing business activity, which characterize how effectively the organization uses its financial resources. To calculate this turnover factor, the cost of sold products must be divided by the cost (average annual) of accounts payable, it shows the required number of revolutions to pay for the invoiced bills.

When assessing the turnover of short-circuiting, the following indicators are used:

• Period of short-term repayment (in days);

• Turnover of short-term (in times).

Turnover of accounts payable is determined through the ratio of proceeds from sales to the average arithmetic value of accounts payable. Average accounts payable is defined as the amount of payables available at the beginning and end of the period divided by two. The period of repayment of accounts payable, for example, in days, is determined by dividing the period in days (for the year it is considered 360 days) for turnover of short-term.

It should be remembered the importance of the length of the period of delay - the longer this period, the higher the risk of non-payment of arrears.

In the ideal case it is desirable that the organization collect debts on accounts of debtors even before it is necessary to pay debts to creditors. If there are a large number of days in the turnover period, this may indicate that there is not enough available cash to meet the current needs that arise in the organization due to reduced sales, increased costs, increased working capital requirements.

For creditors, it is preferable that the turnover of accounts payable and, accordingly, the turnover ratio is higher, while for the enterprise or organization it is much more profitable to have a low coefficient. This allows them to use the balance from the unpaid CZ as a rather convenient (it's free) source to finance their current activities.

Turnover of accounts payable shows the amount (as a rule, during the year) of repayments by the organization of the average amount of its accounts payable.