It is the ratio of total credit purchases and average accounts payable for a given period.
For a given period,
Creditors’ turnover ratio = Net credit purchases / average accounts payable
Average account payable is average value opening and closing balances of account payable for particular period.
Let’s say a company has made credit purchase of Rs 1,00,000 in 2012. Average accounts payable for the year is Rs. 20,000.
Creditor’s turnover ratio = 1,00,000/20,000 = 5.
It means on average, company pays its creditors 5 times in a year. Considering, 365 days in a year, company pays its debt on in an average 365/5=73 days.
Creditors’ turnover ratio is an indicator of the credit worthiness of the company. A high ratio means quick payment to creditors for purchases made on credit and a low ratio may be a sign of delayed payment.
Browse definitions and meaning of more concepts and terms similar to Creditors Turnover Ratio. The Management Dictionary covers definitions and overview of over 7000 business concepts from 6 categories.