The cost of sales/payables ratio measures the number of times trade payables turns over during the year. The higher the payables turnover, the shorter the time between purchase and payment. If a company’s payables turn more slowly when compared to its industry, then the company may be experiencing cash shortages, disputing invoices with suppliers, extended terms or deliberately expanding its trade credit.
Why it Matters to You
Many business owners don't like to owe anyone money and will pay payables as soon as they are received. Although there is nothing wrong with paying your bills as they come in, it does make a difference in your working capital calculation. We always recommend paying bills on the due date and no sooner.