Tips to Optimize Your AP Turnover Days

When you run a business or are in charge of the finance department, there is a long list of things that need to be taken care of. 

Some are part of the routine, others are more strategic.

But do you want to know which one you should never forget about?

Paying to your suppliers or what's the same handling on time your accounts payable (AP)

Having a positive, high ratio of AP means that you're on the right track and are respecting your company's financial obligations. 

The opposite?

Well, let's just say that's not good news at all. 

So how can you be sure your AP turnover ratio is healthy?

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Start measuring it

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Accounts Payable Turnover Ratio

You know what accounts payable is and you know how to handle your accounts payable days- The days where you're expected to carry out the payment. So you have the basis to calculate the ratio. 

AP turnover ratio just measures how long it takes you to pay off your liabilities. 

While it can be done following a simple formula, it's still a key metric to determine your company's actual liquidity and how well it is doing regarding managing payments on time. 

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What's The Ideal AP Turnover Ratio?

The golden question here.

What's a good ratio?

It can depend on your industry or priorities, for example, maybe you have a low ratio not because you aren't respecting your financial obligations but rather because you're working that money on an additional project. 

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High AP turnover ratio 

If your AP ratio is high it usually means that you are paying your suppliers faster. 

So it's possible to conclude that your business has a steady cash flow level and isn't only relying on credit to keep things running.

If you are planning to showcase your business to potential partners or investors, this is going to be a great way to present your company in good condition.

A high ratio is good because:

• Strengthens your suppliers’ relationships. 
• May qualify your company for discounts.
• Overall gives you a boost in terms of trustworthiness.

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In other cases, it could:

• Depending on your general financial status it could put an additional load on your cash reserves.

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Low AP turnover ratio 

Simply put, a low ratio is a signal that you're taking a bit longer to pay your suppliers. 

In most cases, this could be read as a red flag. After all, money is critical to keep your suppliers satisfied working with your business. However,r there are some exceptions where a low ratio doesn't necessarily mean bad news:

• If you are preserving cash for operational needs.
• You are using that money to improve your company's capital.
• Working towards reinvesting initiatives.

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On the negative side…

• If the ratio is too low it could represent financial problems.
• It might put you in a tough position with your suppliers.

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Finding the right balance

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You probably won't like this answer.

Because there's no one-size-fits-all all solution. 

However it's common for businesses to follow industry benchmarks, you could also use your supplier’s expectations and the conditions you agreed to. 

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For example, in the case of the construction industry, it could be normal to work with lower ratios as they negotiate longer payment terms.

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The key is consistency. A declining AP turnover ratio over time could signal trouble like potential cash flow issues, increased reliance on credit, or struggling financial health. On the other hand, a steady or rising ratio is a good sign and might even help your company secure better credit terms from suppliers

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Accounts Payable Turnover Ratio Formula

Up to this point, we know that the AP turnover ratio helps you understand how well your company is handling your commitments to your suppliers.

You only need to implement the following formula:

AP Turnover Ratio = Total Supplier Purchase/  Average Accounts Payable.

Where…

• Total Supplier Purchases = The total amount spent on goods and services from suppliers during the period. If this number isn’t available, Cost of Goods Sold (COGS) is often used as an estimate.
• Average Accounts Payable = The sum of beginning and ending accounts payable, divided by two.

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Let’s say your company had:

Total Supplier Purchases of $500,000

Beginnng Accounts Payable of $50,000

Ending Accounts Payable of $70,000

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Step 1: Calculate Average Accounts Payable

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(50,000 + 70,000) / 2 = 60,000

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Step 2: Apply the Formula

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500,000 / 60,000 = 8.33

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This means the company pays off its accounts payable balance 8.33 times per year

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