Following is summary of the most important Payables-related ratios also called Creditor ratios.
Accounts Payable Turnover Ratio
(a) What does this ratio represent? How many times a company pays off its suppliers in a year.
(b) Formula for AP turnover: Net Credit Purchases ÷ Average Accounts Payable.
(c) Result is Expressed in: "or "x times” per year/period. It’s a pure number (no unit, like days or %).
(d) What does the results signify?
--> Higher number = faster payment to suppliers. It is good from POV of credit score but bad from POV of cash flow.
--> Low number= Paying suppliers slower (better cash flow, but risk of strained supplier relations).
Days payable outstanding
(a) What does this ratio represent? Average number of days taken to pay suppliers.
(b) Formula for DPO = No of days in period ÷ AP Turnover ratio
(c) Result is Expressed in: Days.
(d) What does the results signify?:
--> Higher DPO = Company is holding onto cash longer (positive for working capital).
--> Lower DPO = Paying suppliers quickly.
AR/AP Ratio
(a) What does this ratio represent? Balance between money coming in (from customers) vs. money going out (to suppliers).
(b) Formula: Average Accounts Receivable ÷ Average Accounts Payable
(c) Result is Expressed in: number or percentage.
(d) What does the results signify?:
--> If the result is less than 1: outstanding to suppliers is more than due from customers. Meaning, Cash is flowing out faster than it’s coming in. This can create a cash strain.
--> Greater than 1: collection is more (or faster) than payment to vendor→ good for cash flow.
Payables as % of Current Liabilities
(a) What does this ratio represent? How much of short-term obligations come from trade creditors (suppliers) vs. other debts like loans or accruals. Useful for liquidity analysis.
(b) Formula: Accounts Payable ÷ Current Liabilities (or Total Liabilities) × 100
(c) Result is Expressed in: percentage.
(d) What does the results signify:
--> High % (e.g., >35–50%): Heavy reliance on suppliers to finance operations. It is Positive for cash flow, as business ies using supplier credit instead of draining cash or borrowing from banks
--> Moderate % (20–40%): balanced mix. Business is using both supplier credit and other short-term liabilities in a healthy proportion
--> Low % ( less than 20%): Less use of supplier credit and relying more on bank credit. it also implies faster payments. Signals creditworthiness but not good from cash flow POV.