Accounts payable ratios are designed to measure the operational efficiency of a payables department, as well as its ability to pay suppliers in a timely manner. The operational efficiency ratios are monitored internally as a management function, while the ability to pay is of more interest to outside analysts, who are judging the creditworthiness of a company.
There are only a few ratios specifically targeted at accounts payable. They are as follows:
- Payables turnover. Calculated as total supplier purchases, divided by average accounts payable. A longer turnover interval than the industry average can indicate that a company is not paying its suppliers in a timely manner.
- Percentage of qualifying discounts taken. Calculated as the total dollar amount of qualifying supplier early payment discounts taken, divided by the total dollar amount that could have been taken. Any measurement less than 100% indicates problems with the timely identification and payment of early payment discount deals.
- Percentage of duplicate payments processed. Calculated as the aggregate amount of duplicate invoices paid, divided by the total amount of supplier payments made. Any percentage greater than zero indicates that a company’s payables system is not adequate for the timely identification of duplicate supplier invoices.
The payables turnover figure is relatively easy to calculate. The other two ratios are more difficult to derive since they require access to total available discounts information and the identification of duplicate payments. Given the lack of available information, the latter two ratios tend to result in the under-reporting of lost discounts and duplicate payments.