Creditors or Payable turnover Ratio
A business concern may not purchase its all items on cash basis. Sometimes, there may be credit purchase. This ratio is calculated to find the time taken in paying the creditors amount. It is very similar to Debtors / Inventory Turnover Ratio. This ratio is otherwise called as creditors velocity.
Formula to find Creditors or Payable turnover Ratio
The following formula is used to calculate creditors / payable turnover ratio.
Note: If credit purchase information is not available, total purchase can be used for calculation. If opening trade creditors information is not available, closing trade creditors can be used for calculation.
Significance of Average Payment Period Ratio
This ratio indicates the degree of efficiency of management in paying creditors amount. Generally, lower the ratio, the liquidity of the business concern is in better position and vice versa. In other words, higher the ratio, the company enjoys the credit period allowed by the suppliers and the amount may be used for some other productive purpose. At the same time, the higher ratio may also imply lesser discount facilities availed or higher prices paid for the goods purchased on credit.