Unlike many other accounting ratios, there are several steps involved in calculating your accounts payable turnover ratio.
Calculate Average Accounts Payable For the Period
First, you’ll have to calculate your average accounts payable. This is done by obtaining your beginning and ending AP balance for the period you’re measuring.
Both numbers can be obtained from financial statements such as your balance sheet. Take a look at the following example.
January 1, 2021, beginning AP balance – $77,000
December 31, 2021, ending AP balance – $ 85,000
Next, calculate the average AP balance:
($77,000 + $85,000) / 2 = $81,000
Your average AP balance for 2021 is $81,000
While smaller businesses may find it adequate to calculate this ratio annually, larger businesses will find it more helpful to calculate the accounts payable turnover ratio more frequently.
Calculate Net Credit Purchases
Next, confirm your total supplier purchases for the year. If you’re using QuickBooks or any comparable accounting software application, you’ll be able to obtain this total from a vendor expense report. If you’re calculating this manually, you’ll need to factor in any returns made against purchases.
For example, let’s say your business made total purchases of $395,000 with returns of $20,000. Your net credit purchases for 2021 would be $375,000. This is the number you’ll use in your accounts payable turnover ratio formula.
Calculate Accounts Payable Turnover Ratio
Now that you’ve calculated both your average AP totals for the period and your net purchases, you’re ready to calculate your ratio. The formula for calculating the ratio is:
AP Turnover Ratio = Supplier Credit Purchases / Average Accounts Payable
$375,000 / $81,000 = 4.63
You can also take the calculation one step further by calculating days payable outstanding or DPO, by dividing the number of days in the period by your AP turnover ratio results. Since the calculation above reflects the entire year, your calculation would be:
365 / 4.63 = 78.8, which is the average number of days it takes you to pay your suppliers.