How to Calculate Cycles in Accounts Payable

by Bryan Keythman

A company’s accounts payable is the total money it owes its suppliers for outstanding invoices. You can calculate the accounts payable turnover to see how many times a company completed the cycle of buying inventory from suppliers. The calculation equals the amount of a company’s purchases from suppliers divided by the average accounts payable balance during an accounting period. A lower accounts payable turnover means a company is paying its suppliers slowly, while a higher amount means the company is paying its invoices faster.

Find a company’s income statement and balance sheet in its most recent 10-K annual report. You can obtain these reports from the investor relations section of the company’s website or online from the U.S. Securities and Exchange Commission’s EDGAR database.

Find the amounts of cost of goods sold, beginning inventory and ending inventory on the income statement. For example, assume the company had $500,000 in cost of goods sold - $600,000 in beginning inventory and $400,000 in ending inventory.

Add cost of goods sold and ending inventory, then subtract beginning inventory from your result to calculate the purchases from suppliers. In this example, add $500,000 and $400,000 to get $900,000. Then subtract $600,000 from $900,000 to get $300,000 in purchases from suppliers.

Find the company’s accounts payable balance on its most recent year’s balance sheet as well as on its previous year’s balance sheet. In this example, assume the company had $50,000 in accounts payable on its most recent year’s balance sheet, and $70,000 the previous year.

Add the accounts payable balances, and divide the result by two to calculate the average accounts payable balance the company held during the year. In this example, add $50,000 and $70,000 to get $120,000. Then divide $120,000 by two to get a $60,000 average accounts payable balance.

Divide the amount of purchases by the average accounts payable balance to calculate the accounts payable turnover. Continuing the example, divide $300,000 in purchases by $60,000 in average accounts payable to get an accounts payable turnover of five. This means the company completed the cycle of purchasing and paying for inventory five times during the year.

Tip

  • Compare a company‚Äôs accounts payable turnover over different accounting periods. A consistently increasing accounts payable turnover means a company is paying its suppliers slower, which could signal financial trouble.

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