IGCSE Trade Payable Turnover Analysis
In this lesson, we will learn how to calculate and interpret the trade payable turnover ratio and compare trade payable management performance across different years of the business, and with other businesses.
Related Lessons:
Calculation & Interpretation
Trade payable turnover days measures the average number of days a business takes to pay its credit suppliers after the purchase.
To calculate, we take Closing Trade Payables divided by Credit Purchases and multiply the answer by 365 days.
(Closing trade payables / Credit purchases) x 365 days = x days
A short trade payable turnover day means that the business is paying its debts on time. The advantage to the business:
- Enjoy cash discount
- Obtain a good credit rating
- Ability to negotiate for better purchase price
However, it may lead to tight cash flow if it is not managed well.
A long trade payable turnover day indicates that the business is delaying payment in order to use its funds for short-term investments; or that it is facing cash shortages and therefore taking a longer time to settle its debts.
This may result in:
- Suppliers refusing credit in future
- Suppliers refusing to supply goods till payment is made
- Loss of cash discount
- Increase in late payment fees