Accounts payable ratios
/What are Accounts Payable Ratios?
Accounts payable ratios are designed to measure the operational efficiency of a payables department, as well as its ability to pay suppliers in a timely manner. The operational efficiency ratios are monitored internally as a management function, while the ability to pay is of more interest to outside analysts, who are judging the creditworthiness of a company. There are only a few ratios specifically targeted at accounts payable. They are as follows.
Accounts Payable Turnover
Payables turnover is calculated as total supplier purchases, divided by average accounts payable. A longer turnover interval than the industry average can indicate that a company is not paying its suppliers in a timely manner. A shorter turnover interval can indicate that suppliers are not willing to grant a company extended payment terms. This is the payables metric that company controllers follow the most - and which might also be followed by more senior executives.
To calculate the accounts payable turnover ratio, summarize all purchases from suppliers during the measurement period and divide by the average amount of accounts payable during that period. The formula is:
Total supplier purchases ÷ ((Beginning accounts payable + Ending accounts payable) / 2)
Percentage of Qualifying Discounts Taken
The percentage of qualifying discounts taken is calculated as the total dollar amount of qualifying supplier early payment discounts taken, divided by the total dollar amount that could have been taken. Any measurement less than 100% indicates problems with the timely identification and payment of early payment discount deals. Keep in mind that some discounts offered are not a good deal, and so should not be included in this calculation. This metric is most important for those businesses with enough excess cash on hand to be able to take early payment discounts; it is not of much use if you are in the opposite situation.
Percentage of Duplicate Payments Processed
The percentage of duplicate payments processed is calculated as the aggregate amount of duplicate invoices paid, divided by the total amount of supplier payments made. Any percentage greater than zero indicates that a company's payables system is not adequate for the timely identification of duplicate supplier invoices. This is an important metric, since it represents an unnecessary outflow of cash that might not be recoverable from the payee.
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Ease of Calculation
The payables turnover figure is relatively easy to calculate. The other two ratios are more difficult to derive, since they require access to total available discounts information and the identification of duplicate payments. Given the lack of available information, the latter two ratios tend to result in the under-reporting of lost discounts and duplicate payments.