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Accounts Payable Turnover
How quickly a company pays its suppliers, indicating cash management practices and supplier relationships.
Formula
AP Turnover = Total Purchases / Average Accounts Payable
Days Payable Outstanding (DPO) = 365 / AP Turnover
Average AP = (Beginning AP + Ending AP) / 2
Definition
What is AP Turnover?
Accounts payable turnover shows how frequently you pay suppliers. Higher turnover means paying faster, which may build goodwill but reduces cash float. Lower turnover means stretching payments longer.
AP Turnover Strategy
Balance supplier relationships against cash management. Pay early for discounts (2/10 Net 30 offers 36% annualized return). But don't pay faster than necessary without incentive.
Cash Conversion Cycle
AP turnover is one component of the cash conversion cycle. Longer payment terms combined with faster inventory turns and collections improves working capital.
Example
Ecommerce company:
- Total Purchases: $500,000
- Beginning AP: $60,000
- Ending AP: $40,000
Average AP = ($60K + $40K) / 2 = $50,000
Turnover = $500K / $50K = 10x
DPO = 365 / 10 = 36.5 days average to pay suppliers
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