A business uses the accounts payable turnover ratio to measure the frequency with which it settles its accounts payable (AP). A company’s AP turnover is equally important as accounts receivable turnover because both measure how well a company manages its cash inflows and outflows.

The formula for the accounts payable turnover ratio is the following:

AP Turnover = Total Purchases on Credit / Average Accounts Payable for Period
Average Accounts Payable For Period = (Beginning AP + Ending AP ) / 2

How to Calculate an Example AP Turnover

Company Alpha purchases inventory from three separate suppliers. The company purchases inventory from Supplier Bravo on credit, while the other two suppliers require immediate cash payment. 

Company Alpha wants to calculate its AP turnover ratio for the first six months of the 2024 fiscal year. The company’s balance sheet, income statement, and statement of cash flows show the following data:

  • Accounts payable at December 31, 2023: $65,000
  • Accounts payable at June 30, 2024: $85,000
  • Inventory purchased on credit: $450,000
  • Inventory purchased with cash: $250,000
  • Total inventory purchases: $700,00 (450,000 + 250,000)

Average AP for the Period = ($65,000 + $85,000) / 2
Average AP = $75,000

AP Turnover = $450,000 / $75,000
AP Turnover = 6

A company generally prefers a higher AP turnover ratio because it suggests a company has higher revenues to pay its accounts payable sooner.