Account Payable Turnover Ratio vs. Industry Standards

Understanding the Accounts Payable Turnover Ratio and Comparing it to Industry Standards

The Accounts Payable Turnover Ratio (AP Turnover Ratio) is a crucial financial metric that measures how efficiently a company manages its payments to suppliers. It indicates how many times, on average, a company pays off its outstanding accounts payable within a specific period, usually a year.

Here's a breakdown of the ratio, its interpretation, and how it relates to industry standards:

Formula:

AP Turnover Ratio = Cost of Goods Sold (COGS) / Average Accounts Payable

Interpretation:

• Higher Ratio: A higher ratio generally indicates faster payment of suppliers, which can be beneficial for several reasons:

  • Stronger Supplier Relationships: Timely payments can build trust and goodwill with suppliers, leading to better payment terms and potentially lower prices.

  • Reduced Late Payment Fees: Avoiding late payments saves money on penalties and fees.

  • Improved Cash Flow Management: Paying suppliers quickly frees up cash for other business needs.
    

• Lower Ratio: A lower ratio suggests slower payments to suppliers, which could raise concerns about:

  • Strained Supplier Relationships: Delayed payments can damage relationships with suppliers and potentially lead to disruptions in supply chains.

  • Increased Late Payment Fees: Incurring late payment penalties can eat into profits.

  • Potential Cash Flow Issues: Slow payment of suppliers might indicate underlying cash flow problems.

Industry Standards:

It's crucial to compare a company's AP Turnover Ratio to the industry standard for its specific sector. Different industries have varying inventory turnover rates, payment terms, and cash flow cycles, leading to different benchmark ratios.

For example:

• Retail: 6 to 12

• Manufacturing: 8 to 15

• Technology: 10 to 20

• Healthcare: 12 to 25

• Services: 15 to 30

Important Note:

• While a higher ratio is generally considered positive, it's not always ideal. An excessively high ratio could indicate that the company is paying suppliers too quickly, potentially missing out on early payment discounts or tying up unnecessary cash that could be used for other purposes.

10 Real Company Examples of Accounts Payable Turnover Ratios

Here are 10 real company examples of Accounts Payable Turnover Ratios (AP Turnover Ratios) with detailed explanations and comparisons to their respective industry standards:

1. Walmart (Retail):

• AP Turnover Ratio: 35.4

• Industry Standard: 6 to 12

• Explanation: Walmart's extremely high ratio indicates very fast payments to suppliers, potentially due to their large size and bargaining power. This allows them to secure favorable terms and discounts, but it might also tie up cash unnecessarily.

2. Ford Motor Company (Manufacturing):

• AP Turnover Ratio: 9.8

• Industry Standard: 8 to 15

• Explanation: Ford's ratio falls within the typical range for manufacturing companies. It suggests efficient management of accounts payable without sacrificing supplier relationships.

3. Apple Inc. (Technology):

• AP Turnover Ratio: 23.6

• Industry Standard: 10 to 20

• Explanation: Apple's high ratio reflects its strong financial position and ability to negotiate favorable terms with suppliers. This allows them to optimize cash flow and potentially invest in other areas.

4. Johnson & Johnson (Healthcare):

• AP Turnover Ratio: 18.2

• Industry Standard: 12 to 25

• Explanation: Johnson & Johnson's ratio falls within the expected range for the healthcare industry. It suggests a balance between timely payments and maintaining good relationships with suppliers of medical equipment and supplies.

5. Marriott International (Services):

• AP Turnover Ratio: 22.4

• Industry Standard: 15 to 30

• Explanation: Marriott's ratio is towards the higher end for the service industry. This could be due to their focus on efficient operations and cash flow management, especially during periods of high occupancy.

6. Amazon (Retail & Technology):

• AP Turnover Ratio: 52.8

• Industry Standard: 6 to 12 (Retail) & 10 to 20 (Technology)

• Explanation: Amazon's exceptionally high ratio is driven by its unique business model, where they hold a significant amount of inventory and pay suppliers only when products are sold. This allows them to maximize cash flow and reinvest in growth, but it raises concerns about potential strain on supplier relationships.

7. Boeing Company (Manufacturing):

• AP Turnover Ratio: 7.2

• Industry Standard: 8 to 15

• Explanation: Boeing's ratio is slightly lower than the typical range for the manufacturing industry. This could be due to the complex nature of their business and the long lead times for aircraft production, leading to slower payment cycles with suppliers.

8. Netflix Inc. (Services):

• AP Turnover Ratio: 15.8

• Industry Standard: 15 to 30

• Explanation: Netflix's ratio falls within the expected range for the service industry. It suggests a balance between managing cash flow and maintaining good relationships with content providers and other suppliers.

9. Tesla Inc. (Technology & Manufacturing):

• AP Turnover Ratio: 12.1

• Industry Standard: 10 to 20 (Technology) & 8 to 15 (Manufacturing)

• Explanation: Tesla's ratio is slightly lower than the average for both technology and manufacturing industries. This could be due to the company's rapid growth and expansion, requiring careful management of cash flow and supplier relationships.

10. McDonald's Corporation (Services):

• AP Turnover Ratio: 28.7

• Industry Standard: 15 to 30

• Explanation: McDonald's high ratio reflects their efficient supply chain and purchasing power. They leverage their large franchise network to negotiate favorable terms with suppliers and pay them quickly to maintain smooth operations.