Accounts payable days formula
/What is the Accounts Payable Days Formula?
The accounts payable days formula measures the number of days that a company takes to pay its suppliers. If the number of days increases from one period to the next, this indicates that the company is paying its suppliers more slowly, and may be an indicator of worsening financial condition. A change in the number of payable days can also indicate altered payment terms with suppliers, though this rarely has more than a slight impact on the total number of days, since the terms must be altered with many suppliers to alter the ratio to a meaningful extent.
If a company is paying its suppliers very quickly, it may mean that the suppliers are demanding fast payment terms, either because short terms are part of their business models or because they feel the company is too high a credit risk to allow longer payment terms. A wealthy business might elect to pay its suppliers quickly in order to keep them operational, especially during economic downturns when they might otherwise be in difficult financial situations.
How to Calculate Accounts Payable Days
To calculate accounts payable days, summarize all purchases from suppliers during the measurement period, and divide by the average amount of accounts payable during that period. The formula is:
Total supplier purchases ÷ ((Beginning accounts payable + Ending accounts payable) / 2)
This formula reveals the total accounts payable turnover. Then divide the resulting turnover figure into 365 days to arrive at the number of accounts payable days.
The formula can be modified to exclude cash payments to suppliers, since the numerator should include only purchases on credit from suppliers. Otherwise, the number of payable days will appear to be too low. However, the amount of up-front cash payments to suppliers is normally so small that this modification is not necessary.
There are some issues to be aware of when using this calculation. Companies sometimes measure accounts payable days by only using the cost of goods sold in the numerator. This is incorrect, since there may be a large amount of general and administrative expenses that should also be included in the numerator. If a company only uses the cost of goods sold in the numerator, this results in an excessively small number of payable days.
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Example of Accounts Payable Days
The controller of ABC Company wants to determine the company's accounts payable days for the past year. In the beginning of this period, the beginning accounts payable balance was $800,000, and the ending balance was $884,000. Purchases for the last 12 months were $7,500,000. Based on this information, the controller calculates the accounts payable turnover as:
$7,500,000 Purchases ÷ (($800,000 Beginning payables + $884,000 Ending payables) ÷ 2)
= $7,500,000 Purchases ÷ $842,000 Average accounts payable
= 8.9 Accounts payable turnover
Thus, ABC's accounts payable turned over 8.9 times during the past year. To calculate the accounts payable turnover in days, the controller divides the 8.9 turns into 365 days, which yields:
365 Days ÷ 8.9 Turns = 41 Days
How to Improve Your Accounts Payable Days
There are several ways to improve your accounts payable days situation, so that you are holding onto your cash for as long as possible. Here are some options:
Negotiate longer terms. One way to remediate the situation is to negotiate longer payment terms with suppliers, though this may require you to accept higher prices in exchange for the delayed payment privilege.
Find new suppliers. Many suppliers will not accept longer payment terms. When this is the case, conduct an ongoing search for other suppliers who might be more amenable to taking longer payment terms.
Terms Similar to Accounts Payable Days
The accounts payable days formula is also known as creditor days.