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:
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Net Credit Purchases = Total Purchases – Cash Purchases (only credit purchases are considered).
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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:
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Net Credit Purchases = ?6,00,000
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Opening Trade Payables = ?80,000
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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:
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A higher ratio means the business pays its suppliers quickly (may miss credit advantages).
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A lower ratio means delayed payments (could hurt supplier relationships if excessive).
