Is Your AP and Accounts Payable Turnover Ratio Optimized For Better Financial Control?

An important indicator of financial health

Like all software automation systems, automated AP generates vast amounts of data that can be reported and analyzed. In the realm of AP, the Accounts Payable Turnover Ratio (APTR) is an important financial metric that can be easily obtained through an automated Accounts Payable system. APTR assesses how effectively a company manages its accounts payable process by measuring the frequency with which it pays off its suppliers. This ratio is significant for a number of reasons.

The Accounts Payable Turnover Ratio is not unlike Accounts Payable Days, also known as AP Days or Days Payable Outstanding (DPO). However, APTR offers a wider range of insights into a company’s working capital management, supplier relationships, cash flow efficiency, and overall financial health. Monitoring this ratio allows stakeholders to gauge operational efficiency, identify potential risks or inefficiencies, and make informed decisions to drive business success.

Calculating your Accounts Payable Turnover Ratio

The APTR may be calculated by generating the necessary reports from the AP automation system. For a manual calculation, it’s a matter of dividing the total purchases made on credit by the average accounts payable during a specific period.

APTR formula

Accounts Payable Turnover Ratio = Total Credit Purchases / Average Accounts Payable

Definitions

• Total Credit Purchases This figure is the total purchases made on credit during the specified period. It is calculated as the sum of all purchases made on credit during the period.

• Average Accounts Payable This figure is the average accounts payable balance over the same period. It is calculated by adding the start and end accounts payable balances and dividing by 2.

Reading the APTR

The Accounts Payable Turnover Ratio indicates how many times a company pays off its accounts payable balance within a specific period, typically a year. A higher APTR indicates that the company pays off its suppliers more frequently. In contrast, lower APTR suggests that payments are being made less often, potentially indicating inefficiencies in accounts payable management or extended payment terms negotiated with suppliers.

APTR calculation example

For the accounting period April 1 2024 through March 31 2025

Total credit purchases April 1 2024 through March 31 2025 = $6.75m

Accounts payable balance April 1, 2024 = $1.2m

Accounts payable balance March 31, 2025 = $1.3m

Average accounts payable = ($1.2m + $1.3m) / 2 = $1.25m

APTR = $6.75m / $1.25m = 5.4 times per year

Optimizing AP automation and APTR for better control of finance

An enterprise with automated accounts payable (AP) processing can optimize its Accounts Payable Turnover Ratio (APTR) in several ways:

• Faster invoice processing Automated AP streamlines the invoice processing workflow. This efficiency reduces the time between receiving an invoice and recording it in the AP ledger, ultimately accelerating the payment cycle.

• Improved accuracy Automated AP utilizes advanced technologies, such as machine learning, to accurately capture invoice data and eliminate manual errors. This accuracy reduces the likelihood of payment disputes or delays, ensuring timely payments.

• Enhanced invoice visibility Automated AP provides real-time visibility and transparency into the status of invoices throughout the payment process, allowing finance teams to track and monitor invoice approval workflows, pinpoint bottlenecks, and identify how to expedite payments.

• Optimized payment scheduling Automated AP enables companies to implement dynamic payment scheduling based on factors such as due dates, payment terms, and cash flow projections. With optimized payment timing, companies maximize available cash resources, minimize late payment penalties, and open the door to better deals with suppliers.

• Streamlined approval workflows Automated AP offers customizable approval workflows, accelerating review and authorization. Streamlining this process and reducing manual intervention will speed up invoice processing and payment cycles.

• Comprehensive reporting and analytics Automated AP provides robust reporting and analytics capabilities that enable analysis of AP performance metrics. A system may not directly generate APTR, but obtaining the appropriate reports to perform a manual calculation should be straightforward.

Using APTR to analyze its historical performance and compare it with industry benchmarks, an enterprise is equipped to spot trends, identify efficiency improvements, and make data-driven decisions. Automated AP processing allows the optimization of payments and adjustment of the APTR. Ultimately this allows an enterprise to exert better strategic control over its financial performance.