Creditors Turnover Ratio shows the relationship between the net credit purchases and the average creditors. This ratio is expressed as a rate.
Purpose:
Purpose of this ratio is to
1) Calculate the speed with which creditors are paid off on an average during the year.
2) Calculate the creditors' velocity to indicate the period taken by the average creditors to be paid off.
3) Judge how efficiently the creditors are managed.
Formula:
Components:
1) Credit purchases means gross credit purchases minus purchases returns.
2) Average creditors mean average of opening and closing amount of creditors. If details are not given then only closing creditors may be considered as average creditors.
3) Amount of bills payable.
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