A low accounts payable turnover ratio indicates that the company is having trouble paying off its bills from sales.
Best option is to lower your costs while improving your cash flow from sales to repay your creditors.
Overview
Accounts payable represent trade credit that is essentially “free” financing, and it is an essential source of short-term financing. Companies able to pay off supplies frequently throughout the year are seen to have a high probability of making regular interest and principal payments as well.
The Accounts Payable Turnover Ratio is a Liquidity Ratio that measures how many times a company can pay off its average accounts payable balance during a year. This ratio is calculated by adding the ending inventory to the cost of goods sold and then subtracting the beginning inventory. The ratio increases as more purchases are made, or as a company decreases its accounts payable.
The formula for calculating the Accounts Payable Turnover Ratio
Total Purchases (Materials + Equip + Subs + End Inv – Beg Inv) / Accounts Payable
A payables turnover of 6 suggests that, on average, the company used and paid off the credit extended six times during the period or once every 61 days (365 ÷ 6).
Higher is Better: Indicates the company is paying off its creditors. A high ratio may suggest that a company is not effectively utilizing the credit extended to them.
Lower is Worse: A low ratio indicates that a company is having trouble paying off its bills or is taking advantage of lenient suppler credit policies.