What is Accounts Payable Turnover?
Accounts payable turnover is a liquidity and efficiency ratio that measures how many times a business pays off its average accounts payable balance during a period. A higher ratio means faster supplier payments; a lower ratio means slower payments and possibly tighter cash management.
How It Works
- Calculate total credit purchases for the period (or use cost of goods sold as a proxy).
- Determine average accounts payable (opening + closing balance / 2).
- Divide credit purchases by average accounts payable to get the turnover ratio.
- Convert to days payable outstanding (DPO) by dividing 365 by the turnover ratio.
Saudi Context
Saudi SMEs and corporates monitor AP turnover and DPO closely, especially during VAT cash flow planning. Suppliers also factor in DPO when extending credit, with many Saudi industries operating at 60-90 days DPO and using ZATCA-aligned Fatoora invoices for support.
Example
A Saudi company has SAR 12 million credit purchases and an average AP of SAR 2 million. AP turnover is 6 times, equivalent to DPO of about 61 days. Management aims to push DPO to 75 days to free up working capital.