In the vast landscape of business operations, many factors contribute to a company’s success and financial health. While some aspects may take center stage, others quietly operate beneath the surface, yet have significant influence. One crucial aspect that quietly influences its financial health is accounts payable. With AP automation, businesses can streamline their accounts payable processes, improving efficiency and accuracy.
One important metric you should track to gauge the health of your accounts payable process is the accounts payable turnover ratio. In this guide, we’ll break down everything you need to know about the accounts payable turnover – from what it is to how to calculate and improve it.
The accounts payable turnover ratio is a financial metric that measures how efficiently a company pays back its suppliers. It provides important insights into the frequency or rate with which a company settles its accounts payable during a particular period, usually a year.
The Accounts Payable (AP) turnover ratio offers more than just a snapshot of payment habits—it’s a strategic metric that can influence financial decision-making, supplier negotiations, and overall business stability. Here’s what this ratio reveals and why it matters to finance leaders:
A high AP turnover ratio suggests your business is consistently paying suppliers on time, which helps reduce outstanding liabilities and maintain healthy cash flow. For CFOs and controllers, this reflects well-managed working capital and a disciplined approach to financial operations.
Timely payments foster stronger partnerships with vendors and open the door to better terms, early payment discounts, and improved service levels. A declining AP turnover ratio may raise supplier concerns or result in stricter credit terms, impacting procurement and production timelines.
Creditors and investors closely monitor this ratio to evaluate a company’s liquidity and short-term financial stability. A strong AP turnover ratio can reinforce confidence among stakeholders, while a weak one may signal cash constraints or inefficiencies in payables processing.
A lower ratio isn’t always negative—it may reflect a deliberate strategy to extend DPO (Days Payable Outstanding) and preserve cash. However, the key is intentionality: finance leaders should continuously assess whether extended payment cycles are supporting or hindering broader business goals.
Calculating the accounts payable turnover ratio is relatively straightforward. You just need two pieces of information: your total purchases and your average accounts payable. It is calculated by dividing the total purchases made on credit by the average accounts payable during that period.
The formula for calculating Accounts Payable Turnover is:
The average accounts payable is calculated by taking the sum of the beginning and ending accounts payable balances and dividing it by two. It represents the average amount of money owed to suppliers during the specified period.
In the above accounts payable turnover equation, the total credit purchases refer to the total amount of purchases made on credit by the company. This includes goods or services acquired from suppliers or vendors with an agreement to pay at a later date.
Let’s say a company ABC has:
Total Credit Purchases = $500,000
Beginning Accounts Payable = $50,000
Ending Accounts Payable = $70,000
Here are the steps that need to be followed to calculate the accounts payable turnover ratio
Step 1: Calculate Average Accounts Payable
Average AP = (50,000+70,000) / 2 = 60,000
Step 2: Apply the AP Turnover Formula
What This Means: The company ABC pays off its accounts payable 8.33 times per year. This indicates that they have a strong supplier payment efficiency.
To get the most value from Accounts Payable turnover ratio, it’s essential to analyze it in context and interpret what the numbers mean for your business.
1. Working capital efficiency
A higher ratio typically means you’re settling payables more frequently, which may indicate disciplined financial operations.
2. Liquidity position
It signals how well the company can meet short-term obligations—something closely watched by investors and creditors.
3. Supplier management
Trends in this ratio can reveal how effectively you’re managing supplier terms and maintaining vendor trust.
1. Compare with industry benchmarks
Your AP turnover ratio only gains meaning when compared to relevant industry standards. For instance, manufacturing firms may operate on different payment cycles than software companies.
2. Monitor trends over time
Tracking the ratio year-over-year or quarter-over-quarter helps identify whether operational efficiency is improving or slipping.
3. Align with your cash flow strategy
Not all low ratios are bad—and not all high ones are good. The key is strategic alignment:
4. Assess supplier terms and negotiation strategy
Your turnover ratio is often influenced by how well supplier terms are negotiated and managed.
Regularly reviewing supplier agreements and payment behaviors helps ensure your AP practices are supporting—not hindering—your cost control and relationship management goals.
5. Leverage automation to drive improvement
If inefficiencies or manual bottlenecks are causing delayed payments and pulling down your turnover ratio, automation can help.
Solutions like automated invoice capture, PO matching, and approval workflows can streamline the payables process and help you maintain a healthy, consistent turnover ratio.
Understanding what your number means in real-world terms is key to making better financial decisions:
1. High AP turnover ratio
A high AP turnover ratio indicates fast payment cycles, strong liquidity, and disciplined management. While this fosters supplier trust, it could also mean you’re not fully leveraging available payment terms—possibly sacrificing working capital flexibility.
2. Normal AP turnover ratio
A normal AP turnover ratio reflects a well-balanced payment strategy. You’re likely making timely payments while taking advantage of credit terms, supporting healthy cash flow and stable supplier relationships.
3. Low AP turnover ratio
A low AP turnover ratio suggests longer payment cycles, which may be due to tight cash flow, process inefficiencies, or a strategy to preserve liquidity. This can strain supplier relationships and may lead to less favorable terms or penalties over time.
Note: A low ratio doesn’t always mean trouble—but it does demand scrutiny. The goal is intentional, strategic cash management—not reactive delays.
Improving the accounts payable turnover ratio requires a balance between efficient payment management, supplier relationships, and cash flow optimization. Companies should focus on strategies that help them pay suppliers promptly while maintaining financial flexibility.
1. Negotiate favorable terms: Seek discounts or early payment incentives from suppliers to encourage prompt payment.
2. Streamline accounts payable processes: Implement efficient systems and procedures to expedite invoice processing and payment approval.
3. Optimize cash flow management: Forecast cash flows accurately and plan payments accordingly to ensure timely settlements.
4. Maintain good communication with suppliers: Proactively communicate with suppliers to address any payment issues promptly and maintain strong relationships.
1. Negotiate extended payment terms: Engage in discussions with suppliers to negotiate longer payment periods to preserve cash flow.
2. Prioritize payments strategically: Assess the financial impact and urgency of each payment to determine the optimal timing for settlement.
3. Improve working capital management: Analyze inventory levels, accounts receivable, and cash flow patterns to align payment obligations with available cash better.
4. Explore alternative financing options: Consider short-term financing solutions to bridge any temporary gaps in cash flow without significantly impacting the AP turnover ratio.
Remember, the decision to increase or decrease the AP turnover ratio should be based on the specific circumstances and financial goals of the company. It’s essential to strike a balance between maintaining good relationships with suppliers and managing cash flow effectively.
Accounts Payable (AP) Turnover Ratio and Accounts Receivable (AR) Turnover Ratio are both important financial metrics used to assess different aspects of a company’s financial performance.
Here’s a comparison between the two:
| AP Turnover Ratio | AR Turnover Ratio |
|
Measures how efficiently a company pays off its suppliers and vendors by comparing total purchases to average accounts payable. |
Measures how efficiently a company collects payments from its customers by comparing total credit sales to average accounts receivable. |
|
Focuses on the management of a company’s liabilities and its ability to pay its suppliers on time. |
Focuses on the management of a company’s liabilities and its ability to pay its suppliers on time. |
|
A high ratio indicates that a company is paying off its suppliers quickly, which can be a sign of efficient payment management and strong cash flow. |
A high ratio suggests that a company is collecting payments from customers quickly, indicating effective credit management and strong sales. |
|
A low ratio may indicate slower payment to suppliers, which can strain relationships and affect credit terms. |
A low ratio may indicate issues with collection practices, credit terms, or customer financial health. |
HighRadius’ Accounts Payable Automation solution is equipped with purpose-built technologies that directly support businesses in improving their Accounts Payable turnover ratio. By accelerating invoice processing and reducing delays, HighRadius helps organizations optimize the speed and efficiency of outgoing payments—key drivers of a higher AP turnover ratio.
Here’s how HighRadius contributes to this specific financial metric:
AI-driven invoice data capture reduces manual entry time and errors, enabling faster invoice approvals and payment processing—leading to quicker turnover of accounts payable.
Automated 2- or 3-way matching against purchase orders and receipts eliminates hold-ups caused by mismatches, allowing invoices to be processed and paid on time.
With intelligent exception handling, the system quickly identifies and routes discrepancies for resolution, minimizing invoice aging and ensuring payments are made within optimal timeframes.
Real-time reporting and analytics provide insights into processing lags and cycle times, allowing businesses to take corrective actions that improve the speed of AP processing—and thus, enhance the AP turnover ratio.
By driving faster invoice throughput and reducing backlogs, HighRadius enables businesses to meet their DPO (Days Payable Outstanding) strategies more effectively—resulting in a stronger, more favorable AP turnover ratio.
HighRadius helps organizations enhance their AP turnover ratio by streamlining the full invoice-to-pay cycle, reducing delays, and increasing throughput—all of which contribute to more efficient management of short-term obligations.
If your business is facing challenges like slow invoice processing, frequent payment delays, or difficulty meeting DPO targets, trust HighRadius to help you optimize your AP turnover ratio. Schedule a demo today, or contact us to learn more about how we can solve your most pressing AP efficiency challenges.
The average payable turnover ratio can vary across industries and companies. It is important to benchmark against industry peers to determine what is considered average for a specific sector. Generally, a higher turnover ratio (between 6 to 10) indicates more efficient management of accounts payable.
Yes, a high accounts payable turnover ratio is generally considered favorable. It suggests a company’s ability to pay off its accounts payable quickly. It signifies robust cash flow management, where funds are readily available to honor obligations, fostering trust and reliability among suppliers.
A good AP to AR (Accounts Payable to Accounts Receivable) ratio is typically greater than 1:1, suggesting effective cash flow management with AP more than AR. A ratio closer to 2:1 in favor of AR is considered healthy, while a ratio closer to 3:1 may suggest opportunities for business investment.
Every industry has its benchmarks when it comes to a good turnover ratio. But ideally, in most industries, a turnover ratio between 6 and 10 is considered good. Ratios below 6 may indicate that the business is not generating sufficient revenue to meet its supplier obligations consistently.
Days Payable Outstanding (DPO) measures the average number of days it takes a company to pay its AP. But the AP turnover ratio measures how quickly a company pays off its accounts payable within a specific period. In short, DPO is about the timing of payments, while AP turnover ratio is about frequency.
The AP turnover ratio is calculated using the following formula:
AP Turnover Ratio = Total Credit Purchases / Average Accounts Payable
This formula helps determine how often a company clears its payables over a given period.
The AP turnover ratio measures how efficiently a company pays off its supplier invoices. A higher ratio suggests faster payments, while a lower ratio may indicate delayed payments or cash flow challenges.
The accounts payable turnover ratio is useful for measuring payment efficiency but has limitations. It doesn’t account for industry variations or seasonal cash flow fluctuations. For a complete financial picture, it should be analyzed alongside Days Payable Outstanding (DPO) and working capital metrics.
Positioned highest for Ability to Execute and furthest for Completeness of Vision for the third year in a row. Gartner says, “Leaders execute well against their current vision and are well positioned for tomorrow”
Explore why HighRadius has been a Digital World Class Vendor for order-to-cash automation software – two years in a row.
For the second consecutive year, HighRadius stands out as an IDC MarketScape Leader for AR Automation Software, serving both large and midsized businesses. The IDC report highlights HighRadius’ integration of machine learning across its AR products, enhancing payment matching, credit management, and cash forecasting capabilities.
In the AR Invoice Automation Landscape Report, Q1 2023, Forrester acknowledges HighRadius’ significant contribution to the industry, particularly for large enterprises in North America and EMEA, reinforcing its position as the sole vendor that comprehensively meets the complex needs of this segment.
Customers globally
Implementations
Transactions annually
Patents/ Pending
Continents
Explore our products through self-guided interactive demos
Visit the Demo CenterPlease fill in the details below
Please fill in the details below
We have seen financial services costs decline by $2.5M while the volume, quality, and productivity increase.
Colleen Zdrojewski
Trusted By 800+ Global Businesses
