![]() In some cases, it may simply mean that a particular business has negotiated favourable payment terms that allow for debts to be paid less frequently. However, it’s important to keep in mind that a low accounts payable turnover ratio isn’t always a warning sign. This information is particularly vital to SMEs exporting overseas, where any delayed payments can result in restricted cash flow. A low ratio may indicate some form of financial distress, while a higher one is a good sign that you’ll be paid what you’re owed within a shorter period of time. A higher ratio is a good sign, as it means a business is paying off its debts more quickly.įor businesses considering whether or not to trade with a particular partner, taking a look at the creditors turnover ratio is an important step. This calculation provides a business with its accounts payable turnover ratio. COGS refers to the basic costs associated with a company producing its product, while average accounts payable is the average amount owed to creditors. So far so simple, but how is an accounts payable turnover ratio calculated? Without going too deep into the maths behind these ratios, the basic formula is calculated by dividing the cost of goods sold (COGS) by the average accounts payable. ![]() ![]() The word ‘creditor’ narrows things down to payments made to anyone whom a business owes money to. This relates back to the more general term ‘credit turnover’ which simply means the number of total transactions made during a particular time frame. In essence, a creditors turnover ratio is a measure of how often a particular company pays off its debts to suppliers within a given accounting period. These different terms can be slightly confusing, but all mean the same thing. A creditors turnover ratio can be referred to by a variety of different names.Ī creditors turnover ratio can be referred to by a variety of different names, including a payables turnover ratio, trade payables ratio and accounts payable turnover ratio.
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