Creditors / Accounts Payable Turnover Ratio:
Definition and Explanation:
This ratio is similar to the
debtors turnover ratio.
It compares creditors with the total credit purchases.
It signifies the credit
period enjoyed by the firm in paying creditors. Accounts payable include both
sundry creditors and bills payable. Same as
debtors turnover ratio,
creditors turnover ratio can be calculated in two forms, creditors turnover
ratio and average payment period.
Formula:
Following formula is used to calculate creditors
turnover ratio:
Creditors Turnover Ratio = Credit
Purchase / Average Trade Creditors
Average Payment Period:
Average payment period ratio gives the average credit period enjoyed from the
creditors. It can be calculated using the following formula:
Average Payment Period = Trade
Creditors / Average Daily Credit Purchase
Average Daily Credit Purchase=
Credit Purchase / No. of working days in a year
Or
Average Payment Period = (Trade
Creditors × No. of Working Days) / Net Credit Purchase
(In case information about credit purchase is not
available total purchases may be assumed to be credit purchase.)
Significance of the Ratio:
The average payment period ratio represents the number of days by the firm to
pay its creditors. A high creditors turnover ratio or a lower credit period
ratio signifies that the creditors are being paid promptly. This situation
enhances the credit worthiness of the company. However a very favorable ratio to
this effect also shows that the business is not taking the full advantage of
credit facilities allowed by the creditors. |
