Data to Dollars: What Each Metric Means & How to Use It to Drive More Profits: Series #15 - Accounts Payable Turnover
When I first started working with builders on their financials, I’d walk into our meetings armed with accurate data, detailed reports, and carefully tracked metrics. I was confident and excited to share what I’d uncovered, knowing these numbers could transform their business.
But there was a problem: I might as well have been speaking another language. It became very clear very quickly that my clients didn’t just struggle to understand the reports—they didn’t know what the metrics meant, let alone what actions to take, if any.
By the time I explained the significance of the metric, I’d already lost their focus. And the worst part? We never got to the best part—the actionable insights that could actually drive their dollars to meet their goals!
Enter: The Data to Dollars Series and The Playbook for Builder Profitability! In this series, we’ve broken down the key metrics residential construction companies need to track, what they mean for your business, and—most importantly—what to do with them to drive profitability and growth. We’re currently taking every metric covered in the series and packaging them altogether into one Playbook especially for Builders. Armed with this Playbook, you’ll know exactly what to do when with what you find in your financial reports.
Let’s dive into this week’s metric and see how it can help you turn some data into dollars.
#15 - Accounts Payable Turnover
What It Is -
Accounts Payable Turnover measures how quickly your company pays its vendors and subcontractors.
How we calculate it -
Accounts Payable Turnover = Cost of Goods Sold ÷ Average Accounts Payable
For example, if your COGS for the year is $1,000,000 and your average accounts payable is $200,000, your turnover ratio is 5. This means you’re paying off your accounts payable five times a year, or roughly every 72 days.
Why We Track It -
This metric highlights your company’s payment efficiency and financial health. Paying vendors promptly strengthens relationships and avoids late fees, while excessively delayed payments may strain vendor partnerships or indicate cash flow issues.
Why You Need to Know It -
Accounts Payable Turnover helps answer key questions:
Are you paying vendors and subcontractors promptly enough to maintain good relationships?
Are delays in payments a sign of cash flow problems?
Is your payment strategy optimized for cash flow management and supplier goodwill?
What the Accounts Payable Turnover Tells You -
Good: A higher turnover ratio indicates you’re paying vendors promptly and managing obligations efficiently.
Bad: A lower turnover ratio signals delayed payments, which may point to cash flow challenges or inefficiencies.
Action Steps Based on the Accounts Payable Turnover -
If Turnover Is High:
Leverage Vendor Relationships: Prompt payments could position you for discounts or more favorable terms in the future.
Optimize Cash Flow: Ensure your cash reserves remain sufficient to sustain high turnover rates.
If Turnover Is Low:
Review Cash Flow: Identify if delayed payments are due to shortfalls in collections or poor cash management.
Strengthen Vendor Communication: Keep open lines of communication with vendors to maintain trust despite payment delays.
Renegotiate Terms: Explore extending payment terms to align with cash inflows from projects.
If Turnover Fluctuates:
Analyze Payment Cycles: Determine if project timelines, seasonal trends, or inconsistent billing practices are causing volatility.
Establish Consistent Practices: Standardize how and when payments are made to improve predictability.
Conclusion-
Accounts Payable Turnover isn’t just about paying bills—it’s a vital indicator of your business’s cash flow health and operational efficiency. By tracking this metric, you’ll strengthen vendor relationships, maintain financial stability, and ensure your business is prepared to scale.
At Catalyst Construction Accounting & Consulting (Catalyst CAC), we specialize in helping residential construction businesses just like yours track and understand key metrics like GPM and more. Whether you need help with construction bookkeeping (data accuracy, essential construction financials), construction controllership (holistic oversight over construction financial processes & strategic financial guidance), or a construction CFO advisor (forward-looking, strategic, big-picture financial guidance), we’ll work with you to eliminate financial chaos and give you the tools to drive profitability and growth.
Let us help you turn your data into dollars. Contact us today to learn how we can become your valued partner in building a stronger, more profitable business.
What’s Next -
Stay tuned for the next episode in the Data to Dollars Series as we uncover yet another metric to help you operate smoothly while driving profitability to scale your business!
