These two ratios have a direct relationship. Meanwhile, A/R turnover pertains to how quickly a company collects from customers. As discussed earlier, A/P turnover measures how quickly a company pays its suppliers. While both are turnover ratios, each reveals a different aspect of business operations. Review A/P practices: Sometimes, problems with cash flow arise from poor collection of accounts receivable (A/R), which would then affect your ability to pay payables.If you spot an ongoing trend of low A/P turnovers, you might want to investigate your business’ cash management policies and practices to determine where cash problems lie. Review cash management policies and practices: Cash shortage is a common problem for most small businesses.In this case, you should schedule your payments to arrive one to two days before the due date. To maintain positive cash flow, we don’t recommend you pay bills early-unless you can take advantage of early payment discounts. Pay vendor supplier bills on time: A quick way to increase your A/P turnover ratio is to pay your bills on time consistently.If you take advantage of these discounts, you won’t only save money but also increase your A/P turnover ratio automatically because you’ll make your payments well before the standard due date. Generally, it’ll run 1% to 3% if payment is made within seven to 10 days of the invoice date. Take advantage of early payment discounts: Many vendor suppliers offer early payment discounts to encourage prompt payment.Now that you know how to calculate your A/P turnover ratio, you can try to improve it by following our tips below. Cash purchases are excluded in our computation so make sure to remove them from the total amount of purchases.Ī/P Turnover = $8,000 / $2,500 = 3.2 times Ways To Improve Your Accounts Payable Turnover Ratio Remember to include only credit purchases when determining the numerator of our formula. For example, get the beginning- and end-of-month A/P balances if you want to get the A/P turnover for a single month.īy using the formula we provided, let’s compute the A/P turnover. When getting the beginning and ending balances, set first the desired accounting period for analysis. To illustrate how to compute the A/P turnover, let’s assume the following data:Īdd the beginning and ending balance of A/P then divide it by 2 to get the average.Īverage A/P = ($2,000 + $3,000) / 2 = $2,500 You may check out our A/P best practices article to learn how you can efficiently manage payables and stay fairly liquid. You may compare month-to-month or year-over-year A/P turnovers to spot seasonalities and normal occurrences in business operations.Ī/P management is one of the most important bookkeeping responsibilities.
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