Accounts Payable Turnover Ratio
An accounting equation that tells you how fast a company pays its bills. The ratio is: total purchases from suppliers divided by average accounts payable.
The number alone tells you little. Look at it compared to prior periods. Is it falling? The company is taking longer to pay its bills. Rising? They’re paying faster. Let’s say Tesla places an order from Goodyear for one million tires that cost $200 a piece. The order is payable in 90 days. Tesla now shows accounts payable of $200 million. That, along with all the other supplies Elon Musk needs to build his space cars, adds up to Tesla’s accounts payable...call it $5 billion.
To tell whether Tesla is doing better or worse with paying suppliers, we’d divide all those supply purchases over a period of time by Tesla’s average accounts payable balance. If Tesla has bought $5 billion in supplies over the last 90 days and has an average accounts payable balance over that period of $1 billion, its AP turnover ratio is 5.
Let’s say it was 10 in the previous 90 days. So Musk cut his turnover in half, but that’s bad. Very bad. Instead of keeping his suppliers paid and his accounts payable low, he’s relying more on credit and taking longer to pay. Although his cars are quiet, suppliers won’t be if he keeps this up.
Related or Semi-related Video
Finance: What is a Balance Sheet?47 Views
finance- a la shmoop. what is a balance sheet? well it's a snapshot. a financial
reckoning of what you own ,and what you owe at a given moment in time. well note
that a balance sheet is divided into columns like this. on the left are good [balance sheet pictured]
things like things you own. on the right side are things you owe like debts or
obligations you have to pay off. well think for the balance sheet of little
brother Inc. you have total assets of $142 with current assets of a hundred
bucks .80 bucks of that current asset set is cash and twenty dollars is an IOU
from the tooth fairy ie dad ,who woke you up last night [clown next to child's bed]
replacing the tooth and since you're old enough you just winked and he said yeah
I'll get you a twenty from my wallet in the morning. note that if he'd said I'll
get it for you a year and change from now. it wouldn't be a current asset it
would be a long-term asset, because current means that a promise or a
product or whatever turns into cash within a year. you mowed the lawn for the [assets listed]
summer for mrs. garden bottom and billed her $500. she paid you four hundred
ninety dollars and still owes you ten bucks. that money lives in your balance
sheet on the assets side as an account receivable. you have four hundred ninety
seven little blue marbles as your only asset which your friend Billy has
offered you tons of times to buy for twenty four dollars so you can hold that [kids exchange marbles and money]
amount as inventory. it's an asset. since you know you deal in marbles regularly.
and you paid ten dollars for ten year rights to enter your sister Jeannie's
room anytime you want. you still have eight years to go on that paper so you'd
depreciate its value at a dollar a year worth eight bucks today. total everything [balance sheet shown]
up and you have that one hundred forty two dollars in assets on your own
personal balance. sheet okay so what about your liabilities. well you have
total liabilities of a hundred dollars. you owe Joe lunch bully thirty bucks to
learn why you'll stop hitting yourself. or rather to stop doing so you owe him
thirty bucks tomorrow and you know you'll owe him sixty bucks a year in
change from now maybe more in the future and maybe not if you grow and put on a [ laughing boy is offered cash]
few pounds. but you are conservative financially so you reserve that 60 bucks
as if it's a certain long-term debt, so it goes down there on
line 13 .you borrowed ten bucks from your boo
Amy the auditor for lunch she actually submitted to you an invoice. albeit
romantically. so you have ten bucks on line eight there .so you have one hundred
forty two dollars in total assets and a hundred dollars in total liabilities, but
wait they don't balance. oh no what shall we do ?well a balance sheet accounts for
this it's called ale and it stands for assets minus liabilities equals equity. [man gives thumbs up]
well you have assets $142 we just outlined and you can subtract your
liabilities which we just outline of a hundred bucks and you have net equity
value to your life of $42. it looks like little brother Inc doesn't have to worry
about filing for bankruptcy anytime in the near future which is good because
with Joe lunch bully in the picture, life is hard enough as it is. [kid frowns as bully pushes his own hand in his face]
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