What will be the trade payables turnover ratio

The Trade Payables Turnover Ratio (also known as Creditors Turnover Ratio) measures how quickly a business pays off its suppliers. It shows how many times, on average, trade payables are paid during a period.

???? Formula:

Trade Payables Turnover Ratio=Net Credit PurchasesAverage Trade Payables\text{Trade Payables Turnover Ratio} = \frac{\text{Net Credit Purchases}}{\text{Average Trade Payables}}Trade Payables Turnover Ratio=Average Trade PayablesNet Credit Purchases?

???? Where:

• Net Credit Purchases = Total Purchases – Cash Purchases (only credit purchases are considered).

• Average Trade Payables =

  Opening Trade Payables + Closing Trade Payables2\frac{\text{Opening Trade Payables + Closing Trade Payables}}{2}2Opening Trade Payables + Closing Trade Payables?

  (Trade Payables = Sundry Creditors + Bills Payable, if included)

???? Example:

Assume:

• Net Credit Purchases = ?6,00,000

• Opening Trade Payables = ?80,000

• Closing Trade Payables = ?1,00,000

Then:

Average Payables=80,000+1,00,0002=?90,000\text{Average Payables} = \frac{80,000 + 1,00,000}{2} = ?90,000Average Payables=280,000+1,00,000?=?90,000 Payables Turnover Ratio=6,00,00090,000=6.67 times\text{Payables Turnover Ratio} = \frac{6,00,000}{90,000} = 6.67 \text{ times}Payables Turnover Ratio=90,0006,00,000?=6.67 times

???? Interpretation:

• A higher ratio means the business pays its suppliers quickly (may miss credit advantages).

• A lower ratio means delayed payments (could hurt supplier relationships if excessive).