![]() Making adjustments for both credit sales and credit purchases, both of which can affect cash flow and your ability to pay vendors early or on-time.Īnother component of business continuity planning with a direct impact on AP turnover is supply chain resilience and flexibility.Even standard businesses like retailers experience a significant bump to sales over the course of the winter holiday season, but seasonality can make or break businesses that rely on strong performance during a limited time each year.Īs a result, it’s important to have clear, complete, and accurate sales and spend data for any given period. For instance, your accounts payable turnover ratio is directly affected by your revenue and the payment terms set by your creditors.īut it’s indirectly vulnerable to disruption by larger economic factors that also affect your business as a whole.įor seasonal businesses, for example, every accounting period is a literal case of feast or famine. Simply doing business in the modern economy means navigating a complex chain of interdependencies that might not be apparent at first blush. Make Managing Liquidity Part of Your Business Continuity Planning “Choosing a centralized, cloud-based solution like PurchaseControl gives you the transparency and control you need to collect, organize, and analyze the data necessary to a strategic, rather than haphazard, approach to managing cash flow, supplier relationship management, and overall business process optimization.” Optimizing Your Accounts Payable Turnover RatioĪ few simple best practices can help you strike the right balance for your AP turnover ratio. Take the time to monitor and analyze your company’s accounts to gain the insights necessary to help you build a dynamic and proactive framework for ensuring payables turnover is providing not just working capital, but strategic value. There’s no single “best” way to approach AP turnover, other than the approach that best fits your company’s goals and balance sheet. In other cases, they may have leveraged supplier relationship management to negotiate very favorable credit terms that allow them to pay less frequently while avoiding both late payments and the usual penalties that come with slower payments. That’s not always a bad thing, however, since companies with a lower accounts payable turnover ratio may simply prefer to pay as close to the due date as possible. A high turnover ratio is ideal for companies who want to build or repair their credit quickly.Īt the other end of the spectrum, a low accounts payable turnover ratio shows creditors you pay more slowly, leading to a higher DPO. This means a lower DPO and has a favorable impact on your credit rating, since it demonstrates your ability to return capital quickly and consistently. Generally speaking, it’s better to have a high ratio than a low ratio, since that means you’re paying your short-term debts quickly (and in many cases, early), taking advantage of early payment discounts and meeting or exceeding the repayment expectations of vendors and creditors. Note: You might also divide cost of sales or cost of goods sold (COGS) rather than total supplier purchases (Net Credit Purchases) by the average accounts payable value, depending on your company’s bookkeeping methods. ![]() ![]() Net Credit Purchases ÷ Average Accounts Payable (AAP) = APTR In a nutshell, your AP turnover ratio measures short-term liquidity, tied directly to another important metric, days payable outstanding (DPO). Finding a way to keep sufficient cash on hand to support business goals while building strong supplier relationships requires a strategic approach for maintaining a healthy accounts payable turnover ratio. Why a Healthy Accounts Payable Turnover Ratio Mattersįor businesses big and small, cash flow and vendor relationship management are two business critical concerns. With the right tools and techniques, taking the time to fine-tune this ratio to protect your business operations and relationships is easier than you might think. Like its complement, the accounts receivable turnover ratio, the accounts payable turnover ratio is one of the most important financial ratios companies use to evaluate their near- and long-term success in meeting both their obligations and goals. But that’s only the beginning it also directly affects the health of your relationships with suppliers, and your company’s overall ability to compete, grow, and innovate while still paying the bills. ![]() Whether you call it the accounts payable turnover ratio, the payable turnover ratio, AP turnover ratio, or creditors’ turnover ratio, the number of times you pay your creditors in a given accounting period (measured in number of days) can have a significant impact on short-term liquidity (i.e., cash flow).
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