Payables turnover / Payables turnover ratio

The turnover rate of the suppliers provides information about the utilization of the company's supply stock: it shows the payment discipline and willingness to pay vis-à-vis the suppliers.

The turnover rate of the supply stock shows how many times the company's average supply stock turns over a given period, usually a business year under. The indicator is direct sales cost and the ratio of the general supplier stock. During analyses, it happens that detailed data are not available to calculate the direct cost, in such a case a with net sales they count. In the latter case, however, the indicator skews upward, which is worth paying attention to when evaluating the data. 

A high value of the indicator indicates good payment discipline, a low value may indicate poor ability to pay or solvency. However, these data should always be examined together with the company's market position and other characteristics. For example, a high value cannot be evaluated positively if the company has a strong bargaining position, but does not take advantage of this when establishing payment terms vis-à-vis suppliers.

The order of magnitude of debts owed to suppliers is usually given in days, this indicator is called the supplier's lead time. When calculating, the quotient of the average supplier stock and direct expenses (in the absence of this, net sales) is multiplied by the number of days. The indicator provides information on how many days on average the company pays its suppliers - in Hungarian, how long are financed the company is the suppliers. A high value is in principle favorable, but it can also indicate that the company is struggling with liquidity problems, not because it is not paying because it used its bargaining position, but because it does not have enough its resource to fulfill its liabilities.

The turnover rate of suppliers is a turnover speed of customers and the turnover speed of inventory it is worth examining together with metrics if we want to form an adequate picture of the financing situation of our company. These indicators are also analyzed by banks, if credit would like to be hired by our company.