Trade Payable Turnover Ratio

Trade Payable Turnover Ratio measures how quickly a business pays off its suppliers. Since trade payables (creditors and bills payable) arise from credit purchases, this ratio shows the relationship between net credit purchases and the average trade payables during a period.

Formula

Trade Payables Turnover Ratio = Net Credit Purchases / Average Trade Payable

Average Trade Payable = (Opening Creditors + Opening Bills Payable + Closing Creditors + Closing Bills Payable) / 2

If opening balances are not available, use only the closing figures as the average.

Average Payment Period

This is the number of days (or months) it takes, on average, to pay suppliers. It is calculated as:

Average Payment Period = Number of days (or months) in a year / Trade Payables Turnover Ratio

Usually, 365 days or 12 months are used.

Significance

A lower trade payables turnover ratio means the business is taking longer to pay its suppliers. This could indicate that suppliers are offering a long credit period, or it may reflect delayed payments. Delayed payment is not a good policy because it can damage the business's reputation and strain relationships with suppliers. The average payment period derived from this ratio helps management monitor payment discipline.

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The textbook's worked examples for this topic now live in this chapter's Illustrations & practice tab, alongside their full solutions.

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Key Points to Remember

• Trade payables include both creditors (sundry creditors) and bills payable. …