Plain definition
Payables turnover divides credit purchases for a period by average trade payables for that period. It relates purchasing activity to the supplier credit supporting it. A lower turnover usually means balances remain outstanding longer, but does not reveal whether that delay was agreed.
Use credit purchases when available. Cost of sales is not the same figure: purchases can build inventory, while cost of sales can include inventory bought in an earlier period.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A business makes annual credit purchases of and holds average supplier payables of . Turnover is six times. If purchases stay constant and average payables rise to , turnover falls to three.
The business has retained an additional through supplier credit. If suppliers agreed longer terms, that may support growth. If invoices were simply left unpaid, the same cash improvement may be followed by suspended deliveries, lost discounts, or cash-on-delivery terms.
Why it matters
A lower ratio is not automatically an achievement. Finance can improve today’s bank balance by creating tomorrow’s supply interruption. The distinction lies in due dates, supplier agreements, and the concentration of overdue balances.
Practical consequence
Reconcile the purchase base and average supplier balances on a consistent tax basis. Review overdue amounts separately from balances still within terms. Before changing payment timing, agree extensions and compare the financing benefit with discounts lost and the operational importance of each supplier.
Try your own numbers
Measure cash tied up in receivables and inventory, less supplier credit, then test a target cycle.
Working-capital cycle