Payment behavior directly affects cash flow, supplier relationships, and access to credit. About 55% of all B2B invoiced sales in the U.S. are overdue, according to Atradius 2024 Payment Practices Barometer. The accounts payable turnover ratio tracks how fast a business pays its suppliers and whether that speed is helping or hurting. This post covers what the accounts payable turnover ratio is, how to calculate it, and how to use it.
What Is the Accounts Payable Turnover Ratio?
The accounts payable turnover ratio measures how many times a business pays off its accounts payable balance during a specific period, usually a quarter or fiscal year. A higher ratio means suppliers are being paid more often. A lower ratio means the business is holding onto cash longer before paying. Creditors look at it to decide whether to extend credit. Investors look at it to gauge short-term financial health. Finance teams use it to spot trends in how cash is being managed. There is no single correct number. It varies by industry, company size, and payment terms, and works best when tracked over time and compared to others in the same space.
How to Calculate Accounts Payable Turnover
Account Payable Turnover formula:
AP Turnover Ratio = Net Credit Purchases / Average Accounts Payable
Net credit purchases means total purchases made on credit during the period, minus any returns. Do not include cash purchases.
Average accounts payable is the AP balance at the start of the period plus the AP balance at the end, divided by two.
Example Calculation DPO
A company made $10 million in credit purchases during the year and returned $500,000 in goods. Its AP balance was $1.2 million at the start of the year and $800,000 at the end.
- Net credit purchases: $10,000,000 - $500,000 = $9,500,000
- Average AP: ($1,200,000 + $800,000) / 2 = $1,000,000
- AP turnover ratio: $9,500,000 / $1,000,000 = 9.5
This means the company paid off its average AP balance about 9.5 times during the year.
Days Payable Outstanding (DPO)
To turn the ratio into the average number of days it takes to pay a supplier. DPO is just the AP turnover ratio expressed in days instead of times per period. A higher turnover ratio usually means a lower DPO, and vice versa. You can calculate it thusly...
DPO = Days in Period / AP Turnover Ratio
Using the example above: 365 / 9.5 = 38.4 days
On average, this company takes about 38 days to pay an invoice.
Learn More about Days Payable Outsanding
How to Get Value from This Number
The ratio on its own tells you one thing: payment speed. The real value comes from putting it in context.
Track it over time
A ratio that stays steady suggests stable payment habits. A ratio that drops over several periods could mean cash is getting tight, there are disputes with suppliers, or the business is choosing to slow down payments on purpose. A rising ratio could mean the business has more cash on hand or is paying suppliers faster.
Compare it to your payment terms
If suppliers give you 60 days to pay and your ratio shows you are paying in 30, you may be paying faster than you need to. That means you are either giving up interest income on cash you could be holding or paying short-term borrowing costs you could avoid.
Compare it to how fast customers pay you
If you are paying suppliers faster than your customers are paying you, money is going out faster than it comes in. Watching the gap between AP turnover and accounts receivable turnover helps catch this early.
Compare it to how fast inventory moves
A low AP turnover alongside slow-moving inventory can point to falling revenue. Strong inventory turnover alongside a healthy AP ratio usually means the business is selling well and keeping up with supplier payments.
Compare it to your industry
AP turnover ratios look very different across industries. Retail businesses often land between 10 and 12. Manufacturing companies with longer production timelines tend to be lower. Service businesses with fewer inventory needs are often lower still. Knowing where your number sits relative to your industry gives it meaning.
Use it to negotiate
A strong, consistent ratio gives you something to work with. Suppliers who see reliable payment behavior may be willing to offer discounts for early payment or better credit terms.
How to Improve It
Negotiate better payment terms
Longer payment windows from suppliers reduce pressure to pay quickly and give more room to manage cash.
Take early payment discounts when they make sense
Some suppliers offer a small discount for paying within a shorter window, like 2% off for payment within 10 days. If the discount saves more than you would earn by holding the cash, it makes sense to pay early.
Speed up invoice processing
Slow approvals and manual workflows delay payments even when the business has the cash. Cleaning up how invoices are received, reviewed, approved, and paid removes unnecessary delays.
Manage inventory better
Better forecasting and ordering practices reduce the size and frequency of purchases. Smaller, more regular orders also make cash going out more predictable.
Use credit carefully
Financing supplier payments through credit can free up cash in the short term. But it adds interest costs and long-term debt, so it should be a deliberate choice, not a default.
Further Considerations
A few things that often get left out of basic explanations of this ratio but are worth knowing.
Cost of goods sold as a stand-in
Public companies do not always report net credit purchases as a separate number. When that happens, analysts often use cost of goods sold (COGS) instead. This is a common workaround, but it is not exact. COGS can include non-credit expenses and miss certain credit purchases, so the resulting ratio is an estimate.
Seasonal swings can throw the number off
Businesses that buy or sell more heavily at certain times of year may see the ratio shift depending on when the period starts and ends. A company that does most of its purchasing in Q4 will have a very different ratio for that quarter compared to Q1, even if nothing about its payment habits changed.
The average AP balance is a rough number
The standard formula uses only two data points, the beginning and ending AP balances, to get the average. For businesses where payables swing a lot within the period, this can be misleading. A monthly or weekly average would be more accurate but is harder to get from public financial statements.
The number never tells the full story on its own
A high ratio is not automatically good. A low ratio is not automatically bad. A company with strong bargaining power may slow down payments on purpose to hold cash longer. A company paying quickly may be doing so because suppliers demand it due to weak credit history. The number always needs context.
Conclusion
The accounts payable turnover ratio measures how often a business pays off what it owes suppliers in a given period. It is a simple calculation that gives a useful signal about cash flow, financial health, and supplier relationships.
The number is most valuable when tracked consistently, compared to industry averages, and looked at alongside related numbers like AR turnover, inventory turnover, and DPO.
No single ratio is ideal. The point is not to hit a specific target but to understand what your number means for your business and use that understanding to make better decisions about cash and payments.
