Accounts Payable Turnover Days - Formula - Example - Interpretation - Importance

Here we study about Accounts Payable Turnover Days. Previously we study about Accounts Payable Turnover Ratio.

Accounts Payable Turnover Days Definition

What is Account Payable Turnover Days?

Basically, it is that ratio which shows that how many days the company takes to pay its short term debts to it suppliers. If the company pays its bills quickly, then it is a good sign for the liquidation of the company to main the smooth running of the business. This ratio is also known as Creditors Payment Period or Average Payment Period. If this ratio is low, then it is a good sign for the company as the company pays its bills in short period of time and on time to Suppliers. On the other hand, if this ratio is high, then it does not encourage investors or creditors to invest or give credit to that company.

Accounts Payable Turnover Days Formula

365 / Accounts Payable Turnover Ratio

Example:

If Accounts Payable Turnover Ratio is 2.5 then by applying the above formula, we can calculate Accounts Payable Turnover Days as:

  365 / 2.5 = 166 Days

Analysis / Interpretation

Hence if the company takes 166 Days in paying its bills to Suppliers. If the creditors give 6 months or 180 days to company to pay the bills, then the company can easily pay its short term debts before the due date and hence can avail Purchase Discount from suppliers.

The lesser the ratio is, the more the company is able to pay its short term debts to its supplier and creditors in time or before the due date.

If the ratio is high, then the company fails to pay its short term debts in time and lose the confidence of Suppliers, Creditors and Investors because they understand the liquidity position of the company that is unable to maintain its Working Capital.

Importance / Significance of Accounts Payable Turnover Days

1. This ratio shows the strengths of the company in paying off its short term debts. If the ratio is high, then the entrepreneur is in a good position to meet its bills in time.

2. Investors, Suppliers and Creditors are encouraged to invest and give credits and loans to company as the liquidity position of the company is good to pay off its short term obligations.

So, we can say that Accounts Payable Turnover Days show the strengths of the entrepreneurs in paying off its short term obligations within the Specified Accounting Period.