Creditors or Payable turnover Ratio | Formula | Significance

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.

Creditors / Payable Turnover Ratio (or) Creditors Velocity = Net Credit Annual Purchases / Average Trade Creditors

Trade Creditors = Sundry Creditors + Bills Payable

Average Trade Creditors = (Opening Trade Creditors + Closing Trade Creditors) / 2

Net Credit Annual Purchases = Gross Purchases – Cash purchase – Purchase Returns

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.

Percentage of Net Purchases to Payable = Net Purchases / Payable x 100

Percentage of Payable to Net Purchase = Payable / Net Purchases x 100

Average Payment Period Ratio (or) Average Age of Payable = Average Trade Creditors / Net Credit Purchase per day or Per week or per month

Net Credit Purchase per day or per week or per month =  Net Credit Purchase for the period / No. of days or weeks or months in the period

Average payment period =  Trade Creditors x No. of Working Days / Annual Net Purchases

or

Average payment period = No. of Working Days / Creditors Turnover Ratio

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.

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