Managing Your Accounts Payable Turnover Ratio
You want your company’s overall profile to look good for any potential suitors. And by “suitors,” I mean creditors and those who would potentially loan your company cash. There are a lot of good reasons to make sure you are always top of the list for any loan potentials. If you want to build out a new infrastructure for your company, your accounts payable turnover ratio is going to be crucial to those lenders.
They want to make sure you pay your bills on time. They want to ensure you don’t overspend or over project your cash flow situations. Your ability to manage money is ultra important when it comes to lenders trusting your business to make them money or only pay them back.
How do you calculate your accounts payable turnover ratio? Investing Answers has a wonderful, easy to follow formula listed.
Let’s assume Company XYZ buys $10 million of widget parts this year. Of those purchases, $8 million was on credit, meaning that it did not pay immediately for the widgets it bought. Company XYZ usually carries an average of $400,000 in accounts payable on its balance sheet. Payables are liabilities, and as such, they appear on the balance sheet. In particular, accounts payable are current liabilities, meaning the amount owed is expected to be paid within the next 12 months.
Using this information and the formula above, we can calculate that Company XYZ’s accounts payable turnover ratio is:
Payables Turnover Ratio = $8,000,000/$400,000 = 20
By dividing 365 days by the ratio, we find that Company XYZ takes about 18 days to turn over its accounts payable.
This is the formula that will tell a creditor or potential lender how well you pay your bills. If the number is too low, it may appear that the company doesn’t always pay its bills and debts on time. Too high and well, it might look like your business overspends.
But hey, don’t stress too much. It is never too late to learn these best practices and improve your company’s investing profile.
Thanks for your time,