Accounts Payable Turnover Ratio
An accounting equation that tells you how fast a company pays its bills. The ratio is: total purchases from suppliers divided by average accounts payable.
The number alone tells you little. Look at it compared to prior periods. Is it falling? The company is taking longer to pay its bills. Rising? They’re paying faster. Let’s say Tesla places an order from Goodyear for one million tires that cost $200 a piece. The order is payable in 90 days. Tesla now shows accounts payable of $200 million. That, along with all the other supplies Elon Musk needs to build his space cars, adds up to Tesla’s accounts payable...call it $5 billion.
To tell whether Tesla is doing better or worse with paying suppliers, we’d divide all those supply purchases over a period of time by Tesla’s average accounts payable balance. If Tesla has bought $5 billion in supplies over the last 90 days and has an average accounts payable balance over that period of $1 billion, its AP turnover ratio is 5.
Let’s say it was 10 in the previous 90 days. So Musk cut his turnover in half, but that’s bad. Very bad. Instead of keeping his suppliers paid and his accounts payable low, he’s relying more on credit and taking longer to pay. Although his cars are quiet, suppliers won’t be if he keeps this up.
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Finance: What is an Income Statement?51 Views
what is an income statement I made money yeah that's an income statement and it's [Man jumping up as money rains down]
actually not all that far off from what accountants lawyers bankers and other
forms of humans who count beans call an income statement well cleverly named an
income statement is a statement of income it just states how you made your [Two guys stood at a food stall]
income your french fries smoothie stand like who would have ever thought that
would taste good sold a million units at five bucks each to give you five million
dollars in revenue last year well you had some cost that went with
those sales though you had to buy cups the french fries and other unnamed [Costs of french fries smoothie stand]
ingredients and you had to pay 2 some ones to stand there and convince people
to drink liquefied potatoes then you had to rent space for your stand and buy
insurance and advertise and that abnoxious mascot in the potato costume
you had five million in revenue and three million in expenses and this [revenue of french fries smoothie stand]
number right here that's your pre-tax or operating profit
you then take away your 30% in taxes which on two million dollars is 600
grand and blammo that 1.4 million is your net income or [net income figure for business]
after-tax profit this whole thing right here is your income statement and yeah [income statement for french fries smoothie business]
it can and does get way way more complex than this but let's start with starch
smoothies and work our way up [man at french fry stand thinking about selling sushi shakes]
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