Accounts payable turnover ratio: Formula & how to use it

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The accounts payable (AP) turnover ratio is a valuable metric for understanding how efficiently your business pays its suppliers and manages cash flow. Your business’s AP turnover ratio gives you insights into your payment practices and helps you identify areas for improvement.

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In this guide, we’ll break down what the accounts payable turnover ratio is, how to calculate it, and what it tells you about your financial condition. Whether you’re looking to strengthen vendor relationships or optimize your working capital, understanding this ratio is key to keeping your business financially sound.

What is the accounts payable turnover ratio?

The accounts payable turnover ratio, or AP turnover ratio, is a financial metric that measures the rate at which you pay your suppliers and vendors. It reflects how many times your company can pay off its accounts payable within a given accounting period. A higher ratio indicates faster payments, while a lower ratio may suggest potential cash flow issues or delays in settling debts.

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Your AP turnover ratio gives you a snapshot of short-term liquidity on its own, but when analyzed against other metrics, it can provide even more insight into your company’s financial performance. It can also reveal valuable information on the status of your vendor relationships, operational efficiencies, and creditworthiness.

How to calculate your accounts payable turnover ratio

Here’s the typical accounts payable turnover ratio formula:

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AP turnover ratio = Net credit purchases / Average AP balance

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Let’s explain each input individually:

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• Net credit purchases: This number represents the total credit purchases you posted to your balance sheet during the period—don’t include purchases made with cash. Another way to think about this number is any amounts that you added to your company’s accounts payable balance during the specified timeframe, less any returns.
• Average AP balance: To determine the average accounts payable balance for the period, add the AP balance at the beginning of the period to the AP balance at the end of the period, then divide by two

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You can calculate your AP turnover ratio for any accounting period that you want—monthly, quarterly, or annually. Many businesses calculate AP turnover ratios monthly and plot the results on a trendline to see how their ratio changes over time.

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Here’s an example. At the beginning and end of the year, you had $5,000 and $3,800 in your AP balance, respectively. During the year, you made total supplier purchases of $31,800 on credit and returned $500 of those goods. Using the AP turnover ratio formula from above, you calculate your annual AP turnover ratio to be 7.11:

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$31,800 - $500 = $31,300 net credit purchases

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($5,000 + $3,800) / 2 = $4,400 average AP balance

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$31,300 / $4,400 = 7.11 AP turnover ratio

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This means that you effectively paid off your AP balance just over seven times during the year. 

What does the AP turnover ratio mean?

The AP turnover ratio measures the speed at which a company pays its suppliers. To put it another way, your AP turnover ratio measures your company’s ability to fully pay off your average accounts payable balance.

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A high AP turnover ratio means that you’re paying your suppliers promptly. This could mean that your suppliers have short payment terms; that you’re taking advantage of early payment discounts; or even that you’re working to improve your credit rating by reducing your amount of outstanding credit.

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A low AP turnover ratio means that you’re paying your suppliers back a bit more slowly. A low AP turnover ratio could be a good thing. For example, it’s often favorable to hold onto cash as long as possible so you can use that working capital in other areas of your business.

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A low ratio may also indicate that you’ve negotiated more favorable payment terms, maybe by getting a supplier to move from net 60 to net 90 payment terms. However, an AP turnover ratio that’s too low could also be concerning. It could, for example, indicate that you’re making late payments to suppliers, or that you’re struggling with proper cash flow management.

What is a good AP turnover ratio?

There’s no one-size-fits-all benchmark for an ideal AP turnover ratio. Generally, a higher turnover ratio is considered better because it indicates that you’re able to pay off your AP balance more frequently throughout the year.

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However, this is only true to a point; a turnover ratio that’s too high could indicate that you’re running out of inventory and purchasing supplies more frequently than necessary. As with all financial metrics, it’s important to compare your measurements to industry averages and, even then, consider the valid reasons why your ideal ratio might need to be different.

How can you manage your AP turnover ratio?

What influences your AP turnover ratio?

Your AP turnover ratio is dependent on many factors, including:

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• Seasonality: If your business changes with the seasons, your AP turnover ratio might look different during busy times when compared to slower times
• The types of products you purchase: If you purchase perishable products or supplies, your turnover ratio might be higher than that of a business that purchases items with longer shelf lives
• How quickly your inventory turns over: If your inventory turns over quickly, you’re likely making more frequent purchases on credit and paying off your suppliers at a faster rate. This ensures you can place your next order without maxing out your line of credit or overextending cash reserves.
• Your inventory management strategy: How you manage your inventory will likely affect your AP turnover ratio. For example, if you consistently run low on inventory, your turnover ratio may be quite high since you’re making purchases more frequently. On the opposite end of the spectrum, if you order an overstock of goods and hold those items in stock for months, you likely have a lower turnover ratio than is ideal.

What AP turnover ratio do vendors and suppliers want to see?

If vendors or suppliers are vetting your business for creditworthiness, they may very well look to your AP turnover ratio. If your information is public, they can do this quite easily. Most third parties extending even short-term credit will want to know that you pay your invoices on time, so they’ll likely look for a turnover ratio that’s on the higher end.

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But again, it’s important to consider what’s common in your industry. If you stay within industry averages and have otherwise strong financial statement and balance sheet numbers, your suppliers will likely extend short-term credit to you.

How to improve your AP turnover ratio

If you notice that your AP turnover is off from industry averages or simply isn’t where you want it to be, there are plenty of things you can do to fix it:

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• Improve supplier relationships and negotiate for more favorable credit terms
• Switch suppliers to one with better payment terms
• Streamline and simplify your AP process so that you can pay bills in a timely way and avoid late fees
• Review payment terms and start paying early if you get early payment discounts
• Employ AP automation software to streamline your workflows and ensure bills get paid on time
• Upgrade your inventory management system so you aren’t over- or under-purchasing inventory
• Reduce invoice processing time by relying on automation and artificial intelligence
• Use projection software to eliminate cash flow problems and ensure you have cash to pay bills as they come due

How does the AP turnover ratio fit into your business?

Most companies track their AP turnover ratio over time to see how it’s trending, especially to monitor the effects of any changes they’ve made. For example, if your goal is to get more favorable payment terms from suppliers, a decreasing AP turnover ratio could be a signal that your approach is working.

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But of course, a decreasing AP turnover ratio could also mean that you’re in a cash shortage and are taking longer to pay off your suppliers than you should. When using your AP turnover ratio—or any financial metric, for that matter—consider the big picture before drawing any conclusions.

Other important metrics for analyzing AP turnover ratio

A single AP turnover ratio is, on its own, a somewhat useless data point for financial analysis. A great way to add meaning to your AP turnover ratio is to analyze it against other financial ratios.

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For example, reviewing your AP turnover ratio trendline alongside your trendline for late fees could be beneficial. If your late payment ratio is rising as your AP turnover ratio is falling, you can  conclude that your payment strategy is failing and that you’re overpaying on late fees.

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A few other financial KPIs you should look at alongside the AP turnover ratio are:

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• Days payable outstanding (DPO): Your days payable outstanding measures the average number of days it takes your company to pay its suppliers
• Accounts receivable turnover ratio: The counterpart to the AP turnover ratio is the AR turnover ratio. The AR turnover ratio measures the number of times your company collects its average accounts receivable balance over a given period of time.
• Percentage of discounts captured: This metric calculates the extent to which you’re taking advantage of early-payment discounts
• Inventory turnover ratio: This ratio determines the rate at which inventory stock is sold, used, or replaced

Take control of your AP turnover ratio with Ramp

If you’re looking to strategically manage your AP turnover ratio, automation is key. That’s where Ramp can help.

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Ramp Bill Pay automates your entire accounts payable process, helping you get your AP turnover ratio to wherever you want it to be with no manual work. Ramp’s AP automation software uses AI to record, track, approve, and pay all your vendor invoices, saving you time and money.

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With all your expense data in a single dashboard, you can get real-time visibility into all your financial metrics, giving you a clear picture of your company’s financial health. Learn more about how Ramp’s finance operations platform saves customers an average of 5% a year.