Accounts receivable turnover ratio: formula, decrease and increase

At present, any educated person knows that every firm, organization or enterprise operates with a variety of economic and banking terms, which, in turn, can be quite specific for a common man in the street. The following article will help you understand one of these definitions. In particular, to thoroughly study what is the turnover ratio of accounts payable.

Terminology

First, we will understand what the concept of turnover is. A similar term is a financial indicator that takes into account the intensity of the use of any particular means, assets or liabilities. In other words, it allows you to calculate the speed of one cycle. Such a factor can be considered one of the parameters of business and economic activity of the enterprise in question. In turn, the turnover ratio of accounts payable shows how much money the company is obliged to reimburse to the creditor organization by the appointed time, as well as the amount that will be required to complete all necessary purchases. Thus, we can conclude that the turnover ratio of accounts payable allows you to determine the number of cycles for full payments on the accounts presented. It should also be borne in mind that the supplier of a product may also act as a lender.

Calculation of

The ratio of the turnover of accounts payable (formula) is as follows: it is the ratio of the value of sold products to the average value of the value of the loan obligations. The term cost price can be understood as the total cost of production of a particular product for the year. In turn, the average debt is defined as the sum of the values of the required indicators at the beginning and end of the period under review, divided in half. Nevertheless, it is possible and more detailed detailed calculation and study of all the changes taking place.

The second method

One more variant of calculation of such indicator, as a factor оборачиваемости accounts payable has widely enough extended . Thanks to this method, you can determine the average number of days during which the organization in question will pay all of its debts. A similar variant of the parameter is called the period of collection of liabilities. Its calculation is made by the following formula: the ratio of the average value of debt to the cost of sales, multiplied by the number of days in the year, namely, 365 days.

However, it should be borne in mind that when analyzing on the basis of reports for any other periods, it is necessary to adjust the value of the product accordingly. As a result of such calculations it is possible to find out the average number of days during which the services of suppliers are considered unpaid.

Vibration of values: increase

When examining the performance of an enterprise, it is necessary to take into account that the turnover ratio of accounts payable largely depends on the scale of production, as well as on the scope and industry of activity. For example, for organizations that carry out cash loans, the highest value of the indicator in question is most preferable.

However, for companies that are provided with such assistance, conditions that allow to have a reduced value of the sought parameter are considered more favorable. This circumstance makes it possible to have some margin in the form of a balance of unpaid obligations as a source of free replenishment of financial accounts for the performance of normal work. The increase in the ratio of the turnover of accounts payable leads to the most rapid mutual settlement with all suppliers. This type of obligation is a short-term free loan, therefore, the longer the repayment periods are delayed, the more favorable for the company is the situation, since it provides the opportunity to use other people's finances. If the ratio of the turnover of accounts payable increased, then we can talk about some improvement in the state of the payment capacity of the organization in relation to suppliers of raw materials, products and goods, as well as to extrabudgetary, budgetary funds and employees of the company.

Variations in the quantities: decrease

Decrease in the ratio of turnover of accounts payable can lead to some features described below.

1. Difficulties with payments on invoices.

2. Possible reorganization of relationships with suppliers to ensure a more profitable payout schedule. Thus, if the ratio of the turnover of accounts payable has decreased, then one can speak of both benefits for the enterprise on the one hand, and about the alleged loss of reputation in the other.

Analysis

Of course, when considering the turnover of accounts payable, it is also necessary to take into account the turnover rate of receivables, since if you study only one of the two presented values, you can lose important data. This, in turn, can lead to an unfavorable situation for the organization as a whole, when the first of the above indicators significantly exceeds the second. In addition, from the above, it can be concluded that the high value of creditor obligations contributes to a decrease in both the solvency and overall financial stability of the enterprise.

Benefit of the organization

If you take into account the share of accounts payable, then you can calculate the profit of the company in a fairly simple way. The benefit lies in the magnitude of the difference between the interest rates for loans (in general, it is taken to be equal to the amount of obligations of this type) for the period of the stay of funds in the account of the organization and the amount of this debt itself. In other words, it can be said that the profit of the company in question is determined by the amount of financial savings saved by the fact that it is not necessary to pay interest to banks for loans issued from them.

The positive factor

It can be assumed that the turnover ratio is a quantity that is inversely proportional to the value of the speed of circulation. Thus, it turns out that the higher the coefficient of cyclicity, the less time it takes for a complete revolution. Consequently, if the amount of turnover of receivables is higher than the value of creditor, then they consider that the conditions for further development of the economic and entrepreneurial activity of the enterprise are positive and favorable.

Conclusion

From all that has been said before, we can draw the following conclusions.

1. The value of the ratio of turnover of accounts payable depends on both the scope of the organization and its scale.

2. For companies that provide loans, the highest considered indicator is most preferable, and for organizations that require such payments, advantageous, on the contrary, is a lower value of the ratio.

3. In the process of analysis, one should take into account not only the turnover of accounts payable, but also the treatment of receivables.

4. Debt obligations include not only settlements on loans, but also labor remuneration for employees of the organization, payments to contractors, taxes, fees, relationships with extrabudgetary and budgetary funds.

5. For the favorable development of the entrepreneurial and economic activities of the enterprise, it is necessary that the loan turnover ratio largely exceed the value of the similar indicator for receivables.